The world opens a new stage of weak economic growth with the focus on several red dots. Although abrupt interest rate hikes are taking their toll on Europe, investors fear signs of fatigue coming especially from China. The Bank of International Settlements (BIS) detects “growing concerns about the economic prospects” in the Asian giant despite the fact that it finally decided to lift restrictions linked to covid-19 and applied a flexible monetary policy .
China now stands as one of the great risks facing the global economy. The alarms of half the world go off with each problem that the Asian economy is going through: deflation, the drop in exports and the umpteenth warning of its real estate sector. The BIS quarterly report indicates that Beijing is among investors’ fears. The faltering recovery has caused the profitability of Chinese debt to decline, while that of North American bonds has continued to rise and has remained stable in the euro zone.
The international financial situation, in general, continues to depend on the central banks. In the last year and a half, they have raised the price of money rapidly, taking interest rates to 5.5% in the United States and 4.5% in the euro zone. Central banks on both sides of the Atlantic have sent cautious indications to the markets, leaving the door open to a pause in the escalation and, at the same time, also to new increases. “Investors still seem to anticipate rate cuts as early as the second quarter of 2024, and much deeper in the United States than in the euro zone,” the report indicates.
The rate increases have led international organizations to warn about the risks that a possible recession would have on financial stability. These were already evident when, last spring, Silicon Valley Bank and several medium-sized US banks and, almost at the same time, Credit Suisse, failed. The report also refers to that chapter.
The BIS, in fact, observed during that episode a decrease in deposits in Switzerland during the first quarter of the year. Specifically, the document states that there was a 12% decrease in financing from Swiss international banks. These amounts, according to the BIS, went to Swiss banks more oriented to domestic business. The entity also confirms that there were movements in the United States during these turbulences.
“The United States was at the center of the banking turmoil and is key to dollar financing in the banking system in general,” notes the BIS, which says it has seen “a similar rotation (to that of Switzerland) in dollar financing.” ”. “Depositors in the United States moved their dollar deposits into money market funds, which in turn increased their dollar funding to banks based outside the United States,” he adds.
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