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Currency Analyst since 2010

Risks of another global financial crisis mount

It seems like global financial crisis happened not so long ago, yet it’s been almost a decade. All this time major central banks were trying to revive national economies by lowering interest rates and buying bonds. Such policy, however, brought some unintended consequences in form of global financial market disruptions.

For example, bond yields in major economies should track nominal GDP growth rate. Yet, these yields are currently very low, some even negative. As a result, investors keep piling money into shares making stock markets renew highs even despite weak corporate profits. When high asset prices are not supported by fundamentals, the odds are that they will ultimately have to return to fair levels and these fair levels are significantly lower. In other words, there will be a selloff at the market. If bond yields increase, stocks will have a hard time. Moreover, the selloff of stocks can be triggered by some kind of market shock. The financial system was quick to absorb the results of Brexit vote, but economists think that the real blow will come from China and emerging markets.

There’s an indicator called "credit to GDP gap". If it’s above 10%, the nation is expected to face a banking crisis within the next 3 years. The Bank for International Settlements has revealed this week that for China this reading equals to 30.1% – you can surely see the risks here. No one can actually tell when the bubble will burst, but the odds are that it will happen in more or less foreseeable future, as Chinese authorities don’t seem to know how to solve this problem.

Perhaps, there are more reasons behind the US Federal Reserve’s decision to leave interest rates unchanged. Higher rates in the US will provoke capital flight from emerging market economies. If money goes out of China, it will have to defend the yuan by selling foreign exchange reserves. Such policy could exacerbate the nation’s credit and debt problems setting off global financial bomb.

More chilling thoughts have been recently expressed by UN Conference on Trade and Development (UNCTAD). According to this organization, corporate debt levels in emerging economies exceed $25 trillion, that is more than 100% of their GDP. If capital goes away, these debt levels will become unsustainable. The specialists fear that this may cause the third phase of debt crisis (after subprime mortgage crisis US and European sovereign bond crisis).

It’s not our wish to inflect on you a sense of the approaching doom. Yet, one should be aware of the gross imbalances, which exist at the global financial market. Something is clearly wrong with the current system, and to avoid the next global financial crisis solution should be sought both in developed economies, which flood markets with cheap money, and the developing economies, who are too dependent on their advanced peers. 

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