New risks that confront the post-Lehman world

opinion September 24, 2018 01:00

By Vikram Khanna
The Straits Times 
Asia News network 

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When investment bank Lehman Brothers collapsed on September 15, 2008, Axel Weber – then the president of Germany’s central bank and a top official at the European Central Bank – had a helicopter-view of the mayhem that followed, in the form of the worst global recession since the 1930s.



“There was huge uncertainty as to how we would navigate a difficult environment,” he recalled over coffee on the sidelines of the Singapore Summit last Saturday, which was 10 years after the Lehman collapse, to the day.

“But the crisis management went reasonably well. We had a lot of government intervention but there were no other major casualties.”

Now the chairman of UBS, the world’s largest private bank, the 61-year-old Weber is a hard-wired economist, steeped in both theory and practice. 

Unfinished business

While the global economic system survived the post-Lehman crisis, there is still unfinished business, he says. “Regulation has focused too much on idiosyncratic events – a single bank failure.” There was tighter regulation of the core of the financial system – namely banks. But a lot of banking activity then shifted to non-banks – the so-called “shadow banking system” – which is much less regulated.

For instance, the share of mortgage lending by non-banks in the US has more than doubled since 2008, to almost 50 per cent.

“So, re-regulation was important, but it hasn’t happened holistically. The financial system is only as strong as its weakest links, and there are weak links outside banking that regulators need to address.”

Weber believes the rising US stock market can level off without a crash because there is still enough stimulus to keep the US economy humming this year and next. Ditto for other developed markets. Going forward, he sees weaker growth rates but no major recession. 

Top risk: trade disputes

But right now, the top risk for the global economy, says Weber, is trade tensions, especially between the US and China, which are “rising by the day”.

Last Monday, the US announced new tariffs on US$200 billion worth of Chinese imports. China has retaliated. The US has also started trade disputes with other countries, including Canada and the European Union.

“If these disputes also end with tariffs, that will set back globalisation as well as inclusiveness,” says Weber. “We would not be able to bring more people into the global economy. 

Bringing services into the negotiations could help defuse trade disputes, he suggests, noting that the US has huge surpluses in trade in services.

“So I hope that as the authorities take a broader view and focus not just on trade but on the entire economic relationship, they’ll see more clearly that trade benefits everyone.”

The Chinese authorities as well as companies are moving towards this more holistic view, he points out. “Many Chinese companies are also big providers of services, and they also want global market access in that area.”

Debt bubbles

Weber flags debt as another risk. After a decade of near zero interest rates, the debts of households, companies and governments have risen sharply, and now borrowers are facing higher interest rates.

The unwinding of central bank balance sheets is adding to the problem, he says.

Weber explains that under quantitative easing, some of the major buyers of central bank debt were other central banks. Now central banks are phasing out those policies and putting more debt into the financial markets.

“In compensation for the increase in government debt, the markets will ask for higher returns. We haven’t quite seen it yet, but it’s clearly likely in the longer term - the interest rate environment will look less favourable going forward.”

While some countries such as Germany and Switzerland have managed to keep their debt at healthy levels, in the US, Japan and the rest of Asia, debt levels are high – in many cases, more than 100 per cent of gross domestic product. This could affect future growth. Emerging markets, where corporate debt has doubled since 2008, might be especially vulnerable.

He says that the economies described as the “fragile five” during the previous emerging market currency crisis of 2003, when the Fed announced it was withdrawing its monetary stimulus, “remain fragile”. The five economies were Brazil, India, Indonesia, South Africa and Turkey.

Weber is less concerned about China – a major market for UBS – which also has high levels of corporate debt.

“I’m fairly confident that what China has done will not lead to a substantial decline in growth rates,” says Weber. “They will be able to achieve growth of around 6 per cent this year and next.”

A deal on Brexit

Despite ample reasons to be sceptical about the United Kingdom getting a good deal from the EU on Brexit – which has to take place by March 29 next year – Weber still believes it will happen, because as the deadline draws nearer, the EU will soften its position.

He points out that Brexit is not just about economics – there are also geopolitical and security concerns. “Without the UK, European capabilities in the military area would be quite strongly undermined,” he says. 

Inequality matters

One of the side effects of the financial crisis has been the rise in inequality around the world. In a way, this is good for private banks like UBS, which in some of its promotional material, points out that in Asia, a new billionaire is being created every other day. More billionaires means more potential clients for private banks, but it also means even more inequality. Does this concern the world’s largest private bank?

“It is an issue for UBS,” says Weber. “With the rise of wealth, there comes an obligation to use that wealth wisely and to not disregard the general needs of society.”

He points out that in its dealings with billionaires, the bank finds they are increasingly interested in philanthropy and in making investments that have a social impact. “The younger generation of billionaires do not just want financial returns. They also want social returns,” he says.

The Asian Writers’ Circle is a series of columns on global affairs written by editors at Asia News Network newspapers and published across the region.