With new risks threatening the balance of financial markets, the world has not heeded the lessons of the global financial crisis, says UNSW Business School Director of Global Finance, Fariborz Moshirian.
“The current global financial system remains vulnerable to global and regional financial shocks,” warns Professor Fariborz Moshirian from the UNSW Business School. “Recent tax cuts in the US, along with a significant increase in the US debt-to-GDP ratio are amongst some of the recent, increasing, global risks that could change the global financial equilibrium, and do so very rapidly.”
Professor Moshirian warns this risk could continue growing, particularly if there is much higher inflation and increased interest rates. “This could become a concern, at a time when there is reluctance on the part of the rest of the world to continue embracing the US treasury bills as safe assets.”
A decade ago, Lehman Brothers collapsed. This event led to the loss of confidence in financial market stability and the emergence of the global financial crisis and recession.
At the time there was hope that these events would lead to much more stable financial markets, and “as a result the global banking system was strengthened through new regulation”, says Professor Moshirian, who is Director of the Institute of Global Finance at the UNSW Business School. However, he says, this is not what eventuated.
He warns that “risk from the banking sector has been transferred to other financial sectors such as pension funds and other financial entities such as private equities, investment banks and shadow banking. There are also concerns regarding bloated asset prices and highly leveraged corporations around the world.”
Professor Moshirian is worried that despite the efforts of the G20 and the newly established Global Financial Stability Board, the foundation of the current international monetary system has not yet been changed, and the risk of shocks persists.
“Information sharing, particularly regarding financial data of large banks and shadow banks, remains opaque and the size of global banks keeps expanding. At the same time the interconnectedness of banks, insurance companies, pension funds and governments continues to pose unprecedented global and regional risk.”
He adds that an increasingly interconnected global financial system without sound and interdependent global governance will, by default, be exposed to massive financial shocks and risk in the wake of unexpected global and regional shocks.
“Moving away from the fixed exchange rates that contributed to both the Asian and the Mexican currency crises has resulted in a certain level of financial stability. However, in recent times, due to low interest rates around the world, the significant borrowings in US dollars by corporations in emerging markets potentially threaten global financial stability, regardless of whether cases such as Argentina or Turkey remain more national than global level risk,” he says.
Professor Moshirian can discuss the implications of the challenge facing the world economy.