Though we saw promising reports this week that inflation is slowing down, the IMF is warning that there remain risks to the global financial system that could hamper growth and result in a “hard landing”. The bank collapses we’ve witnessed as of late are further warning signs that there are wider financial issues at play. Meanwhile, the geopolitical tensions that persist, particularly between the West and Russia and the US and China, further undermine global financial stability as well as security. This week, we take a look more specifically at the IMF’s warnings, Poland’s new leadership role, the age of energy insecurity, and the lessons we can learn from banking crises.

IMF Growth Warnings

Top IMF official warns of ‘acute’ risks in global financial system

Colby Smith, Financial Times

IMF warns of ‘hard landing’ for global economy if inflation persists

Chris Giles & Colby Smith, Financial Times

Global economy set for years of weak growth, IMF chief Kristalina Georgieva warns

Chris Giles, Financial Times

Top International Monetary Fund (IMF) officials are warning of acute risks to the global financial system, with years of slow growth ahead and the risk of a “hard landing” in the fight against inflation becoming increasingly more plausible. While the fund has left its forecast from January in place in its latest World Economic Outlook report, turbulence is nonetheless building below the surface and the situation is fragile. In particular, inflation has proved stickier than initially expected, while the sharp rate hikes used to fight it have produced adverse effects, as seen in the wave of bank collapses last month in both the US and Switzerland, in addition to the UK pension crisis in the autumn of last year. Regardless, the IMF managing director Kristalina Georgieva is backing calls to stay the course on interest rate hikes, given that policymakers have proven effective in handling financial crises (such as bank collapses) thus far, but only if financial stability stays balanced and does not deteriorate further. 

Rising Poland

NATO’s new center of gravity

Chels Michta, Politico EU

Poland’s War on Two Fronts

Elisabeth Zerofsky, The New York Times Magazine

The war in Ukraine has positioned Poland as an increasingly prominent player in European politics, with talk of the balance of European power shifting eastwards. As a frontline eastern flank state for NATO, Poland has proven itself pivotal in providing logistical support for military aid flowing from other NATO members into Ukraine. Additionally, the country has accepted the most Ukrainian refugees among the European states, while providing significant amounts of military aid, such as tanks, to Ukraine. Poland has asserted itself as a moral leader in European politics, which afforded it a leadership role in pulling together a coalition of governments willing to send Leopard-2 tanks to Ukraine, including the highly reticent Germans.

Nonetheless, the Polish government is still in the midst of a spat with the European Union over its rightward shift under the ruling Law and Justice party. In particular, the EU has expressed concerns over changes made to the judicial system, which are widely viewed as anti-democratic, as the reforms are believed to put too much power in the hands of the government itself. As a result, the EU has withheld up to $35 billion euros until Poland takes action to address those concerns. Poland, to date, has not budged and continues to fight the European Commission on the issue. As a result, Poland has positioned itself to take on a stronger role in the EU in some respects, while hampering its capacity to enter into a leadership role in others. 

The Age of Energy Insecurity

Jason Bordoff & Meghan L. O’Sullivan, Foreign Affairs

Energy security has become pivotal once again. While hopes that a green energy transition, spurred on by Russia’s invasion of Ukraine, would ease the risk to energy supplies presented by geopolitics, those hopes have proven illusory. In order to maintain energy security for the future, policymakers must include diversification, resilience, integration, and transparency in their models. Diversification includes the diversification of energy supplies, both green and fossil fuels, particularly through a reduction in reliance on Chinese levers over green technologies and critical minerals. Resilience includes implementing an energy system that can sustain shocks as the world moves towards green energy, which includes reserves of fossil fuels to be used as necessary when variability in wind and solar proves insufficient for energy generation. Integration entails maintaining a globalized market, with necessary backstops in place to safeguard against shocks, while maintaining sufficient guards against bad actors playing geopolitics. Finally, transparency through the International Energy Agency, which provides a reduced risk environment, would allow for better pricing and more visible marketplaces.

What I learnt from three banking crises

Gillian Tett, Financial Times

Bank failures in Japan in the 1990s, those in the US during the Great Financial Crisis, and the wave of bank failures last month can provide lessons for banks moving forwards. The first lesson is no bank is an island and bank implosions are a symptom of wider financial issues at play. The second is that banks need to update their risk assessments beyond the issues that caused the prior financial crash. For instance, while credit risk loomed large over the financial crash of 2007 – 2009, interest rate hike risk was not incorporated into financial planning, which ultimately spelled doom for SVB as it held the bag on long-term treasuries, deemed highly safe. The third lesson pertains to that very notion of safety, specifically that assets that are taken for granted as safe, such as long-term treasuries, may ultimately spell trouble. The fourth lesson is to beware of blind spots and in particular cultural patterns of both consumers broadly and a bank’s specific customer base, as consumer culture in both cases can give insight into behavioral trends. The fifth and final lesson is to not bet against bailouts, as banks are simply too essential to the wider economy.