How risky is the current global economic scenario for shipping?

Ten years after the fall of Lehman Brothers, the IMF notes that global financial security is not proven

“A decade after the global financial crisis: are we safer?” Is the title of the new Global Financial Stability Report (GFSR) of the International Monetary Fund (IMF) that coincides with the tenth anniversary of the collapse of Lehman Brothers that precipitated the crisis economic situation of 2008 and of which, of course, maritime freight transport did not escape and it was forced to reconfigure itself to its present characteristics.

Now, the recent comments of the President of the United States appear on the scene. UU Donald Trump says that the Federal Reserve of that country “has gone crazy” after the decision to increase its interest rate from 2% to 2.25%.

According to the weekly Alphabulk report, the 99-page IMF report can be reduced to the following highlights:

-The current financial system is more secure than it was before the 2008 crisis, but …

-The global economic recovery since the 2008 crisis has been uneven and has brought growing inequality.

-There is growing political uncertainty in all areas.

-The commercial tensions that can harm global growth are increasing.

-Financial markets seem complacent about ignoring the risk of a sudden tightening of financial conditions

Since the publication of the previous issue of the GSFR in April, the report suggests that the risks to financial stability have increased “a little”, without it being clear what that means precisely, but beyond that, the IMF report highlights the fact that The new supposedly safer structure of financial markets “is not yet proven”.

What matters to maritime transport

 For Alphabulk the use of the euphemism sounds a bit like a warning and indicates that the IMF identifies the growing debt as a serious problem, since since 1998 the ratio between the total debt of the non-financial sector and GDP has gone from 190% to 250 % in 2017. Adding to the financial sector the proportion of total debt and GDP is slightly higher than 310% and growing.

Alphabulk points out that a growing debt is the byproduct of the money-making process so it qualifies as “funny” see the growing debt, as a danger and that if so, the simplest solution is that the IMF should propose a Different mechanism to create money through loans granted by commercial banks.

Anyway, the Alphabulk report points out the process of creating money is not about to change, therefore, what matters for cargo shipping is that, in fact, too much debt becomes a problem in a Certain moment.

The IMF does not indicate when that moment is, only that the problem is greater and that the financial system inherited from the changes initiated after 2008 has not yet been tested in this environment.

Sensitivity in emerging economies

Another problem identified by the IMF as potentially problematic is the overvaluation of some asset classes such as stocks and houses. For example, in the USA. The valuations of the shares have continued to increase until reaching levels above the levels prior to the crisis, insofar as these valuations seem to extend in relation to the fundamental aspects.

At the same time, the volatility of stock prices in the US UU It has been low, indicating a certain level of complacency among market participants. The IMF report continues to mention that emerging markets are at risk as they are very sensitive to the regressions of investment flows. “An educated way of saying that emerging markets could cause a shock to the global financial system,” says Alphabulk.

Banks also receive some attention from the IMF with an interesting comment: “Banks are stronger, but they are not out of danger yet.” The IMF notes that the Tier 1 capital ratio of the banking sector has gone from an average of 10% before the crisis to more than 15% at present.

But these indices are calculated using the book value of the assets of the banks and, using the market valuations of the banks, these rates are on average below 3%! In addition, several banks are still exposed to what the IMF calls “opaque and illiquid” assets and the increasing sovereign risk of some countries such as Italy.

Slight increase in risk

 The IMF notes that rising trade tensions can be considered to have the potential to seriously affect global growth should the worst-case scenarios arise, and that overall financial conditions are beginning to diverge between countries, with the likelihood that I know. UU continue to increase rates while other developed countries are unlikely to follow that trend.

 In general, and with the possibility of erring present, this report points to a slight increase in the risk to global financial stability. However, such a slight increase does not seem to represent a danger to global economic growth, which is what matters for the world freight sea transport from a macro demand point of view.

Daniel Bosch Wood

Maritimist Lawyer

LLM Southampton

Las Palmas de Gran Canaria