Are we heading into another global financial crisis?

Global institutions and a former central bank chief are among those sounding the alarm

Are we heading into another global financial crisis?
Steve Randall

It’s only the first week of 2021, so let’s try to remain optimistic about what may be ahead. But do we also need to face an uncomfortable truth?

While the stock market rally of 2020 has continued into the new year, especially as hopes of a vaccine-fuelled sea change dominate our thoughts, there are some fears that the financial impact of the pandemic is only set to worsen.

As the sun set on 2020, a survey of institutional investors from 29 countries including Canada and the US found that 83% believe that a global financial crisis is a risk.

The poll by insights firm Block-Builders reveals that six in ten respondents see a serious crisis in the next one to three years.

Several elements inform the opinions of these major investors. Firstly, 80% believe that the markets have not adequately priced-in the long-term risk from the pandemic.

Also, while saving is usually considered a good thing for households, the level at which many have done so during the past year poses a risk.

If the average person decides to continue saving at the elevated rate of 2020, their reduced spending could fuel an economic crisis.

There is also a fear that entrepreneurs could face liquidity issues as those heavily invested in hard-hit industries, especially hospitality, are squeezed.

The report found that 19% of business owners said they have just four weeks of liquidity left.

Looming wave of debt
Others are also warning that things could become more serious in the months and years ahead.

Speaking Monday to the annual meeting of the American Economics Association, former Bank of England governor Mervyn King said that rising debt defaults are a risk.

He warned that defaults among countries and businesses may require major recapitalization to avoid damage to the global financial system which could trigger a financial crisis.

King said that Joe Biden will need to lead on restoring international cooperation.

“The looming wave of debt restructuring, both corporate and sovereign, will be difficult to handle without greater cooperation between countries if we are to avoid another debt crisis,” he said.

Regulatory shift                                 
Ana Botin, executive chair of Spanish-based bank Santander, has called for regulatory changes as part of the economic rebuild.

In the Financial Times, she said that regulators and big banks have learned from the financial crisis of 2008 and built up large capital buffers and healthy balance sheets.

But the way this capital may be used to aid recovery is an area that must be addressed along with a regulatory drive towards green finance.

The banking chief also called for regulation of big tech’s push into financial services, specifically their ability to handle data in ways that banks cannot.

Botin says that a levelling of the playing field is needed to end the advantage afforded to unregulated financial services provided by tech firms.

“A reset is required,” she said.