Financial Crisis Has Created ‘Three-Speed’ World, Says Lagarde
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The global financial crisis has created a ‘three-speed’ world economy with the eurozone at the bottom, and a ‘too-big-to-fail’ banking system that is now “more dangerous than ever”, said Christine Lagarde, managing director of the International Monetary Fund.
The global financial crisis has created a ‘three-speed’ world economy with the eurozone at the bottom, and a ‘too-big-to-fail’ banking system that is now “more dangerous than ever”, said Christine Lagarde, managing director of the International Monetary Fund.
In the curtain-raising speech for the upcoming Spring meetings of the IMF and the World Bank, Lagarde on Wednesday highlighted the emergence of what she calls a “three-speed” global economy, where the differences between global economic regions are “starker than ever.”
Emerging economies were growing fast, she said, but low interest rates in advanced economies were prompting them to build up debt and foreign exchange exposure that could cause trouble.
Countries “on the mend” included the United States and Switzerland, she said. While United States economy is in a better shape compared to the start of the crisis, Lagarde warned that jobs and growth were at risk due to automatic spending cuts that started taking place last month.
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Japan and the eurozone, however, still belonged to a “third speed”, where countries still had “some distance to travel” to recover. While she praised the Bank of Japan’s determination to reverse economic stagnation by pumping trillions of yen into the economy, she cautioned that global banking system, particularly in the eurozone, is the biggest challenge as banks are now “more dangerous than ever”.
According to Lagarde, many banks in the eurozone were still at an early stage of repair, with “not enough capital and too many bad loans on their books”.
“In too many cases – from the United States in 2008 to Cyprus today – we have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a business model that ultimately destabilises the economy. We simply cannot have pre-crisis banking in a post-crisis world. We need reform, even in the face of intense pushback from an industry sometimes reluctant to abandon lucrative lines of business.”
In keeping with the IMF’s imposition of a restructuring on Cypriot banks, she said “the priority must be to continue to clean up the banking system by recapitalising, restructuring or – where necessary – shutting down banks.”
Lagarde said:
[quote] The ‘oversize banking’ model of too-big-to-fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation. [/quote]
Her speech highlights a new phase for the global economy in which the uneven pace of growth around the world is creating new financial imbalances that could sow the seeds of a future crisis.
“In far too many countries, improvements in financial markets have not translated into improvements in the real economy – and in the lives of people,” she said.
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