Loading ...IMF fears the world’s financial system is even more destructive than in 2008
By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, October 16, 2019
The Telegraph, London
Wednesday, October 16, 2019
The International Monetary Fund has presented us with a Gothic horror show. The world’s financial system is more stretched, unstable, and dangerous than it was on the eve of the Lehman crisis.
Quantitative easing, zero interest rates, and financial repression across the board have pushed investors — and in the case of pension funds or life insurers, actually forced them — into taking on ever more risk. We have created a monster.
There are “amplification” feedback loops and chain reactions all over the place. Banks may be safer — though not in Europe or China — but excesses have migrated to a new nexus of shadow lenders. Woe betide us if this tangle of hidden leverage is soon put to the test.
That broadly is the message of the International Monetary Fund’s Global Financial Stability Report, always a thriller but this time almost biblical. “Policymakers urgently need to take action to tackle financial vulnerabilities,” said the fund’s directors piously. It is a bit late for that, my friends.
Even a moderate shock would cause company “debt-at-risk” — that is, where the debtors do not earn enough to cover interest payments — to spiral up to $19 trillion. This is a staggering 40 percent of corporate liabilities.
The tally includes a future cascade of “fallen angels” now perched at BBB ratings just above junk. Such firms will be squeezed mercilessly by tumbling earnings and soaring risk spreads in a downturn.