IMF boss says global economy vulnerable

The Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, has cautioned that the global economy faces a significant threat to its financial stability due to the turbulence in the banking sector. She cited the pressure on debts created by rising interest rates, which has led to “stresses” in leading economies, including among lenders. Georgieva warned that growth would suffer as a result, and the world economy would only expand by 3% this year due to a combination of rising borrowing costs, the war in Ukraine, and the impact of the Covid-19 pandemic. The IMF chief’s comments come amid growing warnings from economic leaders.

Georgieva also expressed concern about risks to financial stability after the recent collapse of Silicon Valley Bank and the Swiss-government brokered rescue of Credit Suisse by UBS. She added that investors would be keeping a close eye on shares in Deutsche Bank as European markets reopen after a sell-off in banking stocks last Friday.

The European Central Bank (ECB) has warned that recent turmoil in the banking sector would have a real-world impact on business and growth. The ECB’s vice-president, Luis de Guindos, said that problems in the banking sector would lead to a tightening of credit standards in the Euro area, resulting in lower growth and inflation.

The UK’s outlook after Brexit is also presenting a challenging trade-off between low growth and high inflation, which puts central bankers in a tricky position when it comes to increasing interest rates. Richard Hughes, the chair of the Office for Budget Responsibility, stated that Brexit would cause economic scars even deeper than the pandemic, leading to an overall output reduction of around 4%.

Guindos also expressed concern that non-bank financial institutions, known as shadow banks, could expose cracks in the financial system, especially as economic stress increases in the UK, EU, and the US. These non-banks, which are outside the supervision powers of central banks such as the ECB, have taken “a lot of risks during the times of very low-interest rates” while “growing as share of the financial system in Europe”, Guindos warned.

Regulators in Switzerland are grappling with the fallout from the collapse of Credit Suisse, which has added to echoes of the global financial crisis caused by the recent toppling of major financial institutions in the US and Switzerland. Although Finma’s head, Prof Marlene Amstad, said that taking disciplinary action against Credit Suisse’s managers remained an option, it was a lower priority than preserving financial stability by overseeing the bank’s merger with UBS.