The biggest threat to the world economy is the banking crisis

While concerns about bank failures in the US and events at the Swiss bank Credit Suisse continue to spread to other banks, especially in Europe, the limited measures that can be taken against possible new problems in the banking sector in the High inflation-interest stagnation are seen as the biggest threat to the world economy.

The failure of Silicon Valley Bank and Signature Bank, the 16th largest bank in the US, last month also put European banks under pressure. The first effect was seen after the Saudi National Bank, the largest partner of Credit Suisse, Switzerland’s second-largest bank, at 167 years old, announced that it would not raise capital. The bank’s shares fell sharply and selling pressure spread throughout the market.

UBS announced on March 19 that it had reached an agreement to acquire Credit Suisse.

The Credit Suisse bailout triggered volatility in European markets as bank bond prices came under pressure, while concerns were raised that the banking crisis could profoundly affect the global economy, which was already under pressure from the high inflation, the high cost of living and the energy crisis. .

The head of the International Monetary Fund (IMF), Kristalina Georgieva, warned yesterday that the world economy is heading towards its weakest period of growth since 1990, as high interest rates set by the world’s main central banks have increased costs debt for households and businesses.

Georgieva said the turmoil in the global banking industry last month showed that there are dangers that central banks must overcome.

“A PROBLEM ALMOST IMPOSSIBLE TO SOLVE”

Director of the London School of Economics (LSE) Department of Finance Center for Systemic Risk, Jon Danielsson, in his assessment of the effects of events in the banking sector on the global economy, said: “Currently the biggest threat for the global economy it is the financial system. . Recently, we have seen the failure of two large banks. Some European banks, as well as Credit Suisse, are under severe pressure. There is a lot of concern that other banks may experience the same problems in the future, either in Europe or in another country.” he said.

Stating that it is more difficult to take action against threats originating from the financial system at the moment compared to the 2008 crisis, Danielsson continued as follows:

“Central banks are raising interest rates to counter high inflation, which creates problems for banks that hold bonds. At the moment, we don’t know if another bank is more vulnerable to raising interest rates to reduce high inflation. Credit Suisse was a weak and poorly managed bank with many problems. There are other European banks that are poorly managed and fragile, Deutsche Bank is the first that comes to mind.

Therefore, new potential problems could trigger the failure of another big bank. This is the biggest threat to the world economy right now. I don’t think central banks and governments have the capacity to deal with these potential problems because they don’t have the financial strength or the money to spend.

Central banks are so focused on inflation right now that they can’t do quantitative easing and print money to help the system. This makes it difficult to give an adequate response to the crisis. So the current situation is an almost impossible problem to solve.”

Danielsson stressed that in the event of a new failure of European banks, the UK economy will be affected as quickly as the regional economy.

“ECONOMIC GROWTH WILL REMAIN EXTREMELY SLOW”

Michael Saunders, a senior economic adviser at Oxford Economics and a former member of the Bank of England’s Monetary Policy Committee, said he expects the effects of the UK banking sector woes and global economic growth to be limited.

Explaining that rising energy prices and recent interest rate hikes in many developed countries have a more restrictive effect on growth, Saunders said: “The reason why central banks raise interest rates is to curb growth.

Falling bank bond prices occur as a normal consequence of higher interest rates. In other words, we can express it as the conversion of the policy rate into real activity. That is why economic growth in many developed countries will continue to be quite slow this year. Monetary policy tightening will be effective in suppressing demand.” made his assessment.

Saunders stated that there is not a single problem affecting the world economy at the moment and that the threats vary by region, saying that “Europe’s problem is energy prices. The story in the US is more about banks, but not like the 2008 financial crisis. The impact of energy prices continues in the UK. Although prices are quite low compared to a few months ago, conditions are still difficult,” he said. (BRITISH AUTOMOBILE CLUB)