The IMF has released its projections for the global economy. I will not insist on them except to highlight their rather gloomy tone, with the balance of risks and improvements biased towards the former. The reason for this lies in inflation that, particularly for core inflation, the Fund sees as more persistent than it had supposed. Corollary? Continuity in interest rate hikes and reduction of the bulky volumes of central bank public debt, which could end up generating a hard landing for the global economy.
But if the World Economic Outlook has been widely commented on, its Global Financial Stability Report has barely been referenced. And from its reading it is convenient to highlight some relevant elements.
First, the banking sector is becoming stressed: interest rate hikes lead to potential losses in their bond holdings (public and private) and make financing more expensive. Second, add the vulnerabilities of the nonbank financial sector: hedge funds, pension funds, insurance companies, and other asset managers. The risks accumulated by the increase in interest rates and the turbulence of the markets are not known. But they are there, latent.
Third, some tensions have already emerged in particular areas of the financial system, such as venture capital, technology or non-residential real estate. Regarding the latter, the ECB has already demanded an increase in its control and operating rules: the possibility that investors withdraw their funds at any time can place companies in the sector in a difficult liquidity position.
Fourth, reminder of what could happen. Before the Lehman Brothers implosion, there were announcements that were interpreted as isolated phenomena: blocking of withdrawals from three Banque Nationale de Paris funds (August 2007), Northern Rock bank run (September 2007) or Countrywide Financial bankruptcy (January 2008) or Bears
Finally, the IMF warns of the difficult balance faced by central banks: monetary policy toughness, to reduce the rise in prices, and prudence, so as not to destabilize the markets. We'll see if they get it.
After more than a decade of monetary expansion, the Fund points to central bank largesse as the source of the current woes: the 2008-22 efforts to soften the impact of the financial crisis may end up blowing up in our faces today. Oh my God! The past of that crisis does not finish dying.
