IMF: A quarter of the banks won't make it
It's amazing just how little was fixed after the 2008 financial crisis that the big banks caused.
Last week's IMF meeting couldn't have made that any more clear.
A global economic recovery would still leave about a quarter of banks in developed countries too weak to support further growth and susceptible to future shocks, the International Monetary Fund said.
Banks controlling about $12 trillion of assets would remain vulnerable during a rosy economic environment marked by faster economic activity, rising interest rates and declining defaults, the IMF said Wednesday in its semiannual report on financial stability. Most of those banks, with $8.5 trillion in assets, are in Europe, according to the report.
So even a best-vase scenario would leave these huge banks on the brink of failure.
Why is that? In one word: debt.
Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and it’s still rising, the International Monetary Fund said. The figure includes debt held by governments, non-financial firms and households.
Current debt levels now sit at a record 225 percent of world gross domestic product, the IMF said Wednesday in its semi-annual Fiscal Monitor, noting that about two-thirds of the liabilities reside in the private sector. The rest of it is public debt, which has increased to 85 percent of GDP last year from below 70 percent.
Slow global growth is making it difficult to pay off the obligations, “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” said the Washington-based fund.
“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF fiscal chief Vitor Gaspar said in prepared remarks. “History has taught us that it is very easy to underestimate the risks associated with private debt during the upswing.”
The problem, as always, is the debt. But the monkey wrench in this situation is that the central banks won't be there to bail out the banks this next time.
Worse is the spreading realization that the central banks have little fuel left in their tanks. Recessions come intermittently and unpredictably. Containing them generally requires 5 percentage points of rate cuts. Nowhere in the industrial world do central banks have anything like this kind of room, even allowing for the effects of unconventional policies such as quantitative easing. Market expectations suggest that it is unlikely they will gain much room for years.