Global Financial Risks Have Risen Amid Bank Turmoil, IMF Chief Warns

IMF Managing Director Kristalina Georgieva participates in a town hall discussion with civil society organizations at IMF headquarters in Washington on Oct. 10, 2022. (Drew Angerer/Getty Images)

The recent collapse of Silicon Valley Bank (SVB) and the rescue of Credit Suisse by rival UBS show that risks to global financial stability have increased, International Monetary Fund (IMF) chief Kristalina Georgieva said at a conference in Beijing on March 26.

Speaking at the 2023 China Development Forum in the capital, Georgieva warned that rapid interest rate hikes by the Federal Reserve combined with increased debt levels have placed extra stress on the economy, and risks to financial stability have risen.

“At a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates to much higher rates—necessary to fight inflation—inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies,” Georgieva said.

The IMF chief also delivered a bleak outlook for 2023, forecasting another “challenging year” for the global economy, with global growth slowing to below 3.0 percent owing to Russia’s ongoing invasion of Ukraine, further monetary tightening, and “scarring” from the COVID-19 pandemic weighing down on economic activity.

“Uncertainties are exceptionally high, including because of risks of geo-economic fragmentation which could mean a world split into rival economic blocs—a ‘dangerous division’ that would leave everyone poorer and less secure. Together, these factors mean that the outlook for the global economy over the medium term is likely to remain weak,” Georgieva said.

Even with a better outlook for 2024, global growth will remain well below its historic average of 3.8 percent and down from 3.2 percent in 2022, according to Georgieva.

Contagion Fears

“So—we continue to monitor developments closely and are assessing potential implications for the global economic outlook and global financial stability. We are paying close attention to the most vulnerable countries, in particular low-income countries with high levels of debt,” Georgieva added.

The IMF chief’s comments follow weeks of turmoil in the banking sector in the wake of the collapse of SVB and U.S. regional lender Signature Bank, which sparked market panic and fears of a broader contagion.

This was exacerbated when banking giant Credit Suisse—which is among 30 financial institutions known as globally systemically important banks—was acquired by rival UBS in a $3.23 billion deal brokered by the Swiss government.

That deal, meant to prevent a collapse of the troubled bank as well as broader market chaos, appeared initially to help calm investor and client nerves. However, those fears resurfaced on Friday, sending bank shares tumbling amid a widespread stock sell-off.

Shares of Deutsche Bank—Germany’s largest bank—fell as much as 16 percent shortly before the weekend, prompting German Chancellor Olaf Scholz to provide reassurances about the bank during a summit in Brussels.

“Deutsche Bank has modernized and organized the way it works. It’s a very profitable bank. There is no reason to be concerned,” Scholz said.

‘Uncertainty Is High’

During Sunday’s conference, Georgieva praised policymakers for acting swiftly and “decisively” in response to financial stability risks, noting that advanced economy central banks have boosted the flow and liquidity of U.S. dollars across the globe.

“These actions have eased market stress to some extent, but uncertainty is high which underscores the need for vigilance,” Georgieva said.

Her comments came the same day that Luis de Guindos, vice-president of the European Central Bank noted that the recent events in the U.S. banking system and Credit Suisse could impact the euro area economy.

“Our impression is that they will lead to an additional tightening of credit standards in the euro area. And perhaps this will feed through to the economy in terms of lower growth and lower inflation,” he told Business Post.

However, de Guindos noted that it is still “too early” to say exactly how the recent turbulence in the banking sector will impact Europe.

While Georgieva painted a less-than-rosy outlook for the global economy this year, she did note that a rebound in China following the recently reopened economy will help prop up the global economy.

The IMF forecasts 5.2 percent GDP growth in China this year, an increase of more than 2 percent from last year.

“The robust rebound means China is set to account for around one-third of global growth in 2023—giving a welcome lift to the world economy,” Georgieva said.