Is another global financial crisis brewing?

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Clive Mphambela
Ten years ago to this very week, Lehman Brothers, which was one of the biggest financial institutions in the world at the time, suddenly went bankrupt.

The 158-year-old investment bank crumbled under the weight of sub-prime mortgages, and the bank failure set off an unprecedented global financial crisis, unseen since the great stock market crash of the 1930s.

Whilst the problems with sub-prime mortgages in the US started being noticed early in 2007, they had been years if not decades in the making, eventually leading to the biggest financial meltdown in history.

In 2007, Ben Bernake, who was then Chairman of the US Federal Reserve, had dismissed the emerging idea that the observed slowdown in the US housing market would ultimately have profound implications on the financial sector. According to the man who was at the helm of the world’s most powerful central bank, the slowdown in housing demand was nothing but a local US problem that would soon blow over. He was very wrong.

Within, a year and half, the US sub-prime mortgage problem had taken a global outlook and had ballooned to trigger the biggest global financial crisis since the 1930s.

When Lehman Brothers went bust in September 2008, filing for Chapter 11 Bankruptcy, it was the fourth largest bank on the planet, behind Goldman Sachs, Morgan Stanley and Merrill Lynch. It was unthinkable that such a large institution would fail, but fail it did.

The bank’s failure was the catalyst for what became a very long month of global turmoil in which no financial institution anywhere in the world was considered safe anymore.

During that time, Zimbabwe was grappling with a financial crisis of its own. Hyperinflation had spiralled, cash shortages were abound and the local currency had been re-based no less than five times.

Inevitably, as we relive the anniversary of those tumultuous weeks of September and early October 2008, we just need to stop for a moment and ask ourselves whether, the events of 2008 could happen again, and if so, what will be the causes? What are the signs?

Taking a deep look into the global economy, there are plenty of potential signposts that spell danger. Many of the issues do not affect us directly here in Zimbabwe, but certainly, we need to be clear that any dislocations in the global economy, including any upsets to the global financial system, may pause risk, even to our local financial environment.

Here are a few issues that may cause disruptions to the global order, which may eventually have spillover effects on the local financial sector.

Are consumer debt levels rising?
The global financial crisis was caused primarily by excessive household debt levels, under conditions of very low interest rates, which incentivised households to engage in extensive consumptive borrowing while financial institutions themselves borrowed very heavily to fund speculative positions.

At the global level, the deep global recession that followed the collapse of Lehman Brothers, however, put a damper on borrowing, but the failure to deal with the root causes of the crisis has meant that consumer debt levels have since risen and are still rising, especially as a share of global gross domestic product.

For Zimbabwe, consumptive lending has been on the rise, with close to 30 percent of banking sector loans attributable to household consumer debt. This level of debt is relatively high, for a small banking sector, but is it enough to upset the cart? Maybe not.

The Zimbabwean banking sector seems rather resilient on that front. For the last three years, total private credit has slowed down markedly, although the share of household loans as a share of total credit has somewhat increased.

However, the percentage of total household debt to GDP for Zimbabwe is very low, making the risk of the wheels coming off very slim.

The financial system is currently very stable
The Reserve Bank of Zimbabwe has made great strides in making the local financial institutions stronger and safer. Over the last 9 years, there has been a marked effort to make the Zimbabwean banks much safer in recognition of the vulnerabilities that were exposed in the 2004 to 2008 period.

Banks are now required to hold more capital following the upward revision of minimum capital thresholds that can act as a buffer in the event that banks suffer the sort of losses on their balance sheets akin to the losses suffered back in the 2004 to 2008 era.

The Zimbabwean banking system is also immune to the sorts of problems that remain in the rest of the global financial system.

Global banks have largely fended off the pressures for structural reforms that followed the great crash of 1929. Since then, banking has become increasingly concentrated and risk has migrated from the more thoroughly regulated banks to other parts of the global financial system, such as hedge funds, that may fall into regulatory blind spots.

Locally, we have composite banking licenses, with very tough regulatory framework that seeks to plug regulatory grey areas, minimizing regulatory arbitrage.

Bank balance sheets of Zimbabwean banks, apart from holding adequate levels of regulatory capital, are also reasonably liquid, with liquidity levels of some 70 percent. One could actually say Zimbabwean banks are under-lent, with loan to deposit ratios averaging below 40 or 50 percent.

Exposure to emerging markets
The dress rehearsals for the global crises of the 1990s and early 2000s took place in countries as far away and as far apart as Mexico, Russia, South Korea and Argentina. Globally, there are once again, strong signs of trouble.

Argentina is in a debt crisis and the problems in South America seem to be mounting. Interest rates are at global lows, largely due to massive processes of money creation known as quantitative easing from Japan to the USA.

This has driven massive capital flows into emerging markets to search for higher yields, which have not been on offer in the first world.

Servicing those debts will have to become more expensive as global interest rates start to tighten, as global austerity takes hold.

The crises that have unfolded in both Turkey and Argentina this year are unlikely to be the last, but could in fact be tell tale signs that all is not well.

Banks operating in the eurozone have also made very little progress than their American counterparts in increasing their equity bases and as a result would be much more exposed in the event of a slowdown in global activity. A full-blown world economic recession would be a killer blow and Zimbabwean banks could be particularly exposed to global shocks as derisking issues take further toll. Most Zimbabwean banks rely on European banks for correspondent banking relationships.

 The U S China Trade War is a Global financial Risk Factor
For now, the global economy appears to be shrugging off the impact of Donald Trump’s protectionist measures but the real crunch point is likely to come in late 2019 and early 2020 when higher US interest rates start to bite and the impact of tax cuts begins to fade.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer is associated with.

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