The global economy is in “completely uncharted waters”, according to a leading voice in the financial regulation sector. Risks have changed since 2008 and a single event is now systemic. 

Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), was speaking at a conference in Lisbon, Portugal, last Friday, when he touched on the unknown risks and unprecedented circumstances that the global economy now faces. He was referring in particular to the monetary policies that have sought to stabilise and regenerate growth following the 2008 financial melt-down, including negative interest rates and the increasing levels of global debt.

Implications of negative rates not understood

He said: “... unconventional monetary policies and a historically unprecedented level of leverage have brought the global economy into completely uncharted waters. Never before have unconventional policies been pursued for so long. Nobody can know how it will end. As Jaime Caruana, General Manager of the Bank for International Settlements, recently put it: ‘At this stage, we don’t fully understand the implications of low, or even negative, rates for the financial system and the economy as a whole’

Enormous debt weighs heavily on global economy

Mr Hoogervorst also raised the issue of the increasing global debt burden, which has grown to levels above those in 2008. Since 2007, global debt has grown by $57 trillion, according to data aggregated by McKinsey. This is a 17 per cent increase in the total debt as a share of GDP, between Q4 2007 and Q2 2014. And all major economies now have higher levels of borrowing relative to GDP than they did in 2007, according to a 2015 report on debt by McKinsey. 

Mr Hoogervorst said: “There can be no doubt that the uncertainty about the sustainability of macro-economic policies and the enormous debt overhang weighs heavily on the global economy. If the 2008 crisis was caused by excessive leverage, what should investors expect in a global economy that is even more leveraged? Even if the banks are better capitalised, are they, or indeed the governments that stand behind them, strong enough to cope with an economic environment that is so loaded with debt?”

Brexit: the “biggest stress test since the financial crisis”

This economic picture doesn't take into account the tremors now being felt as a result of Brexit referendum vote last Friday. Bloomberg columnist Lisa Abramowicz writes that: “global markets are undergoing possibly the biggest stress test since the financial crisis. And they’re not doing too well.”

Abramowicz adds: “Instead, this highlights how a single event can summon chaos because of the interconnection of global markets. The Brexit vote became a systemic event... Today, the risk stems from currency moves and traders all betting around the same central bankers and the same national votes. One nation’s problems can quickly infect the rest of the global economy, bringing everyone down with it.”

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CTMfile take: Brexit has come as a shock to the global economy – during a time when world finances weren't in the most robust health anyway. Rising global debt and the unknown long-term effects of negative interest rates are cause for concern. As is the currency trading now taking place around one event. FX risks need to be closely watched by corporate treasurers.