Macroscope | How much of a fall should the world’s financial markets brace themselves for?
If this ‘bloodbath’ stops short at a salutary correction - knocking maybe 10 to 20 per cent off equity valuations - it would be a mercy and a wonder
Annual meetings of the International Monetary Fund (IMF) and the World Bank seem to coincide with the onset of financial crises, as with the Hong Kong meeting in 1997 (Asian Financial crisis) and the Bali meeting last week (threatened crisis).
Do these gatherings trigger crises by exposing financial vulnerabilities, or exacerbate them (as with the 2008 meeting soon after the Lehman collapse)?
We could call this a “critical mass” theory. The annual gatherings of the so-called “Bretton Woods twins” bring together in one city (or beach resort, as was the case in Bali) not only finance ministers and central bank governors from some 180 countries, but also thousands of bankers and securities company heads (not to mention a few more thousand news-hungry journalists).
If the economic and financial woes of the world’s advanced and emerging economies are going to be laid bare in any one place, and at the same time, the annual meetings are often it. Small wonder then that they can also be places where greed gives way to fear, when things are looking bad, and sell orders get placed from a million mobile phones.
To say that the current market turmoil was a crisis waiting to happen is stating the obvious. This column, for one, has pointed repeatedly to draining global liquidity, rising interest rates, overstretched equity valuations, record debt levels and other vulnerabilities. But predicting crises and calling their timing correctly are different arts.