IMF Meeting: DSGV sees significant global stability risks

Germany’s Savings Banks and Landesbanken anticipate significant risks to global stability. This was pointed out by Helmut Schleweis, President of the German Savings Banks Association (DSGV), at the autumn meetings of the International Monetary Fund (IMF) and the World Bank in Nusa Dua (Bali/Indonesia). “About 10 years after the onset of the financial crisis, we unfortunately note that the world has not become any safer since then. All the players should realise that the situation is very unstable”, said Schleweis.

According to Schleweis, the biggest sources of risk were the significant increase in international debt, the upcoming Brexit, and growing protectionism. In the past 10 years, more than 60 trillion US dollars had been accumulated in new debt. Government budgets had increasingly become accustomed, and dependent on, cheap money. In the euro area alone, debt had increased to nearly four times the GDP of 2017, which was higher than the global ratio. Emerging economies were a particular cause of concern because they were largely dependent on exchange rate fluctuations against the US dollar and because they would have to significantly reduce their bond and credit debts in the next few years.

If Brexit was implemented without a withdrawal agreement, DSGV expected growth in the United Kingdom to decline by 2 percentage points, while growth in the other EU countries was expected to decrease by 0.5 percentage points. However, the legal uncertainty that would be created for market players what would be even more severe because in this case the interpretation of references to British rules in many commercial contracts would be unclear. Against this background, Brexit was one of the greatest concerns for the business clients of Savings Banks and Landesbanken. For this reason, Schleweis called on the negotiators to at least ensure, in an agreement, that the U.K. would continue to comply with current EU rules for a transitional period of two years. If need be, a moratorium should be imposed on the negotiations.

According to DSGV, the primary risk facing the world economy was posed by growing protectionism, mainly initiated by the United States. The trade war between the United States and China indirectly affected the entire world, including Europe and Germany. “Production and value chains have been internationally interlinked for a long time now. In the era of globalisation, it is anachronistic to believe that it was only a matter of importing products from one country into another", said Schleweis. He therefore urged everyone to campaign for free world trade and suggested that Europe should remove its own trade barriers and conclude additional free trade agreements.

For the first time in 10 years, Schleweis expects a new interest-rate phase in Europe, which would probably be characterised by a very cautious phase-out of bond purchases and a large number of extremely small interest-rate moves, spread out over a medium-term period. This would be based, among other things, on the interest-rate policy pursued in the United States, which was now far ahead of Europe in terms of monetary policy normalisation. In the next few months, this would probably lead to capital flows into the United States induced by higher interest rates and the strong economy. The challenge in Europe would be staying both resolute and very cautious when flipping the interest-rate policy lever. The motto for the ECB should be: not too fast, but also not too late.

In view of the global risks, Germany currently is a beacon of stability in the DSGV’s view. According to the findings of Savings Banks and Landesbanken, there is no real estate bubble, nor is lending too easy. Although lending volumes had recently grown significantly, Mr. Schleweis stated, the debt levels of German enterprises were currently much lower than during the periods of much higher interest rates. Because of the high share of fixed-interest and long-term loans, it would also take approximately six years for a rise in interest rates to have its full impact on business enterprises. The market players in Germany were therefore not over-indebted, nor would rising interest rates have an excessive impact on German enterprises. In addition, Germany’s financial system was stable. This applied in particular to the German Savings Banks Finance Group.