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Anna Isaac – The Guardian March 26, 2023

The head of the International Monetary Fund has warned that the global economy faces risks to its financial stability because of the turbulence in the banking sector.

Kristalina Georgieva, the managing director of the Washington-based lender of last resort, said rising interest rates had put pressure on debts, leading to “stresses” in leading economies, including among lenders.

Georgieva said the world economy would expand by just 3% in this year as rising borrowing costs, combined with the war in Ukraine and scarring from the Covid-19 pandemic, would suffocate growth.

Adding to a growing chorus of warnings from economic leaders, the IMF chief said it was clear that risks to financial stability had increased after the recent collapse of Silicon Valley Bank and the Swiss-government brokered rescue of Credit Suisse by UBS.

Investors will be watching shares in Deutsche Bank when European markets reopen on Monday after they led the sell-off in banking stocks on Friday.

“At a time of higher debt levels, the rapid transition from a prolonged period of low interest rates to much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies,” Georgieva said at a conference in Beijing.

Her stark comments came as the European Central Bank (ECB) said the recent turmoil in banking would have a real-world impact on business and growth.

The EU central bank fears problems in the banking sector will result in lower growth and dampen inflation, the ECB vice-president, Luis de Guindos, said in an interview with Business Post.

“Our impression is that they will lead to an additional tightening of credit standards in the euro area. And perhaps this will feed through to the economy in terms of lower growth and lower inflation,” he said.

The outlook for the UK after Brexit is also presenting a challenging trade-off between low growth and high inflation, putting central bankers in a tricky position when it comes to increasing interest rates.

The head of Britain’s public spending watchdog underlined the negative impact of leaving the EU for the UK economy, saying it would cause economic scars even deeper than the pandemic.

“We think that it in the long run [Brexit] reduces our overall output by around 4% compared to had we remained in the EU,” Richard Hughes, the chair of the Office for Budget Responsibility, told the BBC. “It’s a shock to the UK economy of the order of magnitude to other shocks that we’ve seen from the pandemic, from the energy crisis.”

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