A decade after Lehman, investors hunt for clues to next crisis
It’s something that happens every five to seven years” is how JPMorgan Chase & Co CEO Jamie Dimon once defined a financial crisis to his daughter. Queen Elizabeth II asked “why did nobody notice” the seeds of the last one.
Stung by their failure to spot the turmoil of 10 years ago and two decades since Asian markets were roiled, policymakers, traders and economists are looking at the clock as they wonder when and where the next meltdown will hit.
As it holds its annual meetings in Bali, Indonesia this week, the International Monetary Fund is already warning investors may be underestimating the risk of a financial shock. One of the axioms of financial history though is that no two crises are the same so the search is on for potential triggers in the economy and markets. Here is a rundown of potential hot spots:s Lately, Beijing has been taking steps to slow the rate of corporate debt growth, but total debt outside the banking sector continued to rise last year and remains on an unsustainable path.
The odds are against a soft landing. Of 43 cases of rapid growth in debt-to-GDP similar to China’s, only five ended without a major slowdown or financial crisis, according to the IMF.
“While a China hard landing still remains a lowprobability scenario, if it did in fact occur, it would likely unleash a tsunami of contagion across the Asia-Pacific region,” says Rajiv Biswas, chief economist for the AsiaPacific at IHS Markit. Interest-rate hikes by the Federal Reserve coupled with a rising greenback have sent shock waves through emerging markets, making it harder for companies that borrowed in dollars to pay their debts. Argentina is borrowing $57 billion from the IMF, the largest in history. The Turkish lira plunged as investors doubted the ability of Recep Erdogan’s administration to contain inflation.
“Emerging markets that are over-leveraged on US dollar debt and large oil importers are probably the most vulnerable,” said Hak Bin Chua, senior economist at Maybank Kim Eng in Hong Kong. In the last crisis, US household debt was the ticking time bomb. Consumers have since tightened their belts, but US companies have picked up the slack. Taking advantage of low rates, US companies have issued record amounts of debt, pushing key debt ratios to near 30-year highs. It may be harder for the world to respond this time to turbulence, because central banks still haven’t raised rates back to normal levels.