Ex­pert sounds alarm on 8 ways a new cri­sis will hit by 2015

Financial Mirror (Cyprus) - - FRONT PAGE -

Ar­turo Bris, Pro­fes­sor of Fi­nance at IMD Busi­ness School and Di­rec­tor of the World Com­pet­i­tive­ness Cen­tre, pre­dicts that a global eco­nomic cri­sis is likely and that not enough ac­tion is be­ing taken to avoid it. Based on sta­tis­tics, he said the world could ex­pect a fi­nan­cial cri­sis as soon as April 2015, end­ing in March 2016. Bris said the cause of cri­sis will come from eight pos­si­ble sce­nar­ios:

In the last year, stock mar­kets have per­formed un­re­al­is­ti­cally well and at some point the sit­u­a­tion will ex­plode. In 2014 an­a­lysts were dis­ap­pointed in the first quar­ter be­cause earn­ings were not in line with mar­ket ex­pec­ta­tions. This means that if mar­kets were to re­vert to a rea­son­able level with re­gards to earn­ings, there will be a stock mar­ket drop of be­tween 30-35%.

A se­vere cri­sis could be driven by grow­ing Chi­nese shadow bank­ing, a sys­tem which con­sists of loans mainly to govern­ment in­sti­tu­tions whose per­for­mance is not well mon­i­tored and not open to com­pe­ti­tion. If this sys­tem col­lapses, it will neg­a­tively af­fect the global econ­omy.

The United States, as the world’s largest pro­ducer of gas, could cause an en­ergy cri­sis. If the US be­gins ex­port­ing to the rest of the world, Rus­sia might feel threat­ened, caus­ing a geopo­lit­i­cal storm. The US would have con­trol over en­ergy prices and would ex­ert in­flu­ence over coun­tries like the UK, In­dia and Ja­pan.

There is risk of a property bub­ble form­ing in coun­tries like Brazil, China, Canada or Ger­many. Prices are go­ing up be­cause avail­abil­ity of credit is huge and buy­ers are push­ing prices up with­out re­al­is­ing that they do not cor­re­spond to fun­da­men­tal val­ues.

‘BBB as the new AA’ com­pa­nies cur­rently have too much debt and the new norm is to have a BBB rat­ing. In the US there are only three com­pa­nies left with an AAA rat­ing: ExxonMo­bil, Mi­crosoft and John­son & John­son. If rat­ings are an in­di­ca­tor of bankruptcy, there will be bank­rupt­cies across the board. If in­ter­est rates in­creased by 2%, half of the cor­po­rate sec­tor would be wiped out.

Al­most every­where, ex­cept in parts of Europe and the US, there is in­creas­ing geopo­lit­i­cal ten­sion. Events like the cur­rent cri­sis in the Crimea could trig­ger a mar­ket crash, even if there is no war.

Over­all world poverty has in­creased and when­ever the poor be­come poorer we can ex­pect a so­cial con­flict. The cru­sade against in­come in­equal­ity could also fur­ther hin­der in­no­va­tion and growth by re­duc­ing the ben­e­fits of in­no­va­tion, threat­en­ing the econ­omy.

The sur­plus of cash that cen­tral banks and cor­po­ra­tions are hold­ing could end up dam­ag­ing the econ­omy. The ECB is lend­ing money to fi­nan­cial in­sti­tu­tions that put it back into the ECB, which is a vi­cious cir­cle and to­day Google could af­ford to buy a ma­jor­ity stake in Ire­land and Mi­crosoft could buy more than 50% of Sin­ga­pore, which is im­moral.

“While many economies seem to be fi­nally re­bound­ing since the 2008 cri­sis, we shouldn’t be com­pla­cent,” Bris said. “Too of­ten we do not learn from his­tory and do not act when faced with a cri­sis we know is im­mi­nent.”

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