The world is just starting to recover from the last financial crisis as the issue of the next shock is already on the table of economists. At Deutsche Bank, analysts have devoted a long, not very optimistic note on the subject.
They recall that crises return regularly. Especially since the exponential growth of finance, the internationalization of banks, the abandonment of the gold standard… the world economy has become more and more unstable, increasing in passing the frequency and the magnitude of the crises.
Despite the regulation introduced after 2008, supposed to make the world safer, and although the different economies show signs of solid growth, “it would be a huge act of faith to say that crises will no longer be a regular occurrence in the financial system. in place since the 1970s, “warns the German bank.
Deutsche Bank’s economists are careful not to give a precise timetable; they do not advance more on the exact origin of the next financial crisis. Nevertheless, they identified ten major issues of concern for financial stability.
Central banks and the standardization of monetary policies
Since the 2007-2008 crisis, issuing institutions have pursued ultra-accommodative monetary policies. On the one hand, key rates have never been so low. On the other hand, central banks have launched large programs of asset purchases. As a result, their balance sheet has exploded: for the only four main (United States, Europe, England, and Japan), it amounts cumulatively to more than 14,000 billion dollars.
The normalization of monetary policies (end of QE, rising rates, deflating their balance sheet) “is a jump into the unknown and history suggests that there will be substantial consequences given the high price of many assets in circulation, “writes Jim Reid, Deutsche Bank strategist.
Even if central bankers are scared and decide not to tighten their policies, “we remain in an unprecedented situation that will make finance unstable, even though we are currently experiencing record levels of low volatility, “the analyst continues.
The rise of populisms
The recent German elections, which saw the far-right enter the Bundestag, recall that Europe has not finished with the populist movements despite the defeat of the FN in France and the reverse of the populists in the Netherlands.
“The only rise of populism comparable to what we are currently experiencing began in the 1920s and culminated in the Second World War. Even though populism in recent years has proved unpredictable, their rise increases the risks to the world order and could well trigger a financial crisis, “writes Deutsche Bank. The bank recalls that these movements have not, for the moment, destabilized the markets.
Short of ammunition in case of recession?
The first German bank wonders if we are short of solutions to cushion a new shock. Indeed, in the wake of the crisis, the States have been heavily indebted to save their economies. Deutsche Bank is not sure that governments have enough leeway to act as aggressively as needed.
Italy, a crisis waiting to burst
The peninsula is the victim of a triple problem. First, populism is in full swing, driven particularly by the 5-star movement, making the political system even more unstable than it already is. Second, growth is not strong enough to fully talk about recovery.
Finally, the fragmented banking sector is undermined by mountains of bad debts: 350 billion euros or 17% of their balance sheet. “The problem of economic growth is that it requires a sound banking system. The country’s banks have been badly managed for a long time and are spattered with stories of fraud and scandal, “Deutsche Bank said.
Brexit
For many, there is little chance that Brexit will turn sour to the point of triggering the next financial crisis. It is assumed that the compromise is the most likely outcome of negotiations when the destruction of both parties is at stake, says the analyst before recalling that the “extreme” example of the Second World War shows how bad this presupposition is. So be careful; any negotiation can have huge consequences, even if it’s not in anyone’s interest.
A crisis in China
The Chinese Krach in the summer of 2015 has already given cold sweats to traders. “For years, China has been designated as the home of the next crisis. The rapid rise in credit […], the huge sector of shadow banking, not to mention an ever-increasing housing bubble, feeds the fears of economists. They fear that China will make a brutal landing and is the epicenter of a wave of shock that would affect all financial markets around the world. ”
Japan is aging and over-indebted
The Archipelago continues to face the challenge of an aging population, record debt for a developed country, and a central bank whose ultra-accommodative monetary policy is a unique experiment in the world. The problems have been known for a long time, but that will not stop them from triggering a crisis, warns Deutsche.
A lack of liquidity in the markets
Financial markets have changed significantly since the beginning of the 2000s. High-frequency trading has increased, as have listed index funds (ETFs). They try to follow the performance of an index or a raw material. In 2017, they exceeded $ 4 trillion in assets under management.
However, ETFs have never been tested in case of shock. Nobody knows how they would react in case of a major correction. In addition, they are suspected of distorting the markets as they allow individuals to invest independently of market fundamentals.
That’s all?
Deutsche Bank also notes an ever-greater imbalance in current account balances, accentuating the financial system’s instability. Finally, the price of assets reaches a record level in the world like that of bonds.
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