Executive Intelligence Review


Central Banks Will Trigger Crash; Evans-Pritchard Can’t Say Which One

June 18, 2018(EIRNS)—The June 16 Telegraph carried a long op-ed by its International Business Editor Ambrose Evans-Pritchard, warning that the “Big 4” central banks’ collective end of QE by the end of 2018, and rising interest rates, will trigger a financial crash. Headlined “A Worldwide Financial Storm Is Brewing as Central Banks Pick Their Poison,” the op-ed does not determine which poison will cause the crash, but that it will come essentially from excessive debt and rising interest rates.

“The world has never been so leveraged, and therefore so sensitive to a monetary squeeze,” Evans-Pritchard writes. The Institute of International Finance says world debt reached 318% of GDP at the end of 2017, 48 percentage points higher than the pre-Lehman peak. Emerging market debt has jumped from 145% to 210%. That is where the trouble is brewing. It is a near mathematical certainty that the currency crisis in Argentina and Turkey—already nibbling at Brazil, South Africa, and Indonesia—will spread to the rest of the emerging market nexus....”

Judging that the Federal Reserve’s rundown of its assets and increasing rate hikes stem simply from overconfidence, Evans-Pritchard forecasts a “dollar shock.”

“The Bank for International Settlements estimates that offshore dollar debt—much of it borrowed by private companies in East Asia and Latin America—has jumped fivefold to $11 trillion since the early 2000s. There is a further $13 trillion in ‘equivalent’ derivatives, three-quarters with a maturity of less than one year. The nub of the matter is that a surging dollar forces global commercial banks to retrench and causes a liquidity squeeze through complex swap and hedge contracts. It is a toxic cocktail when combined with surging U.S. interest rates as well.”

By contrast, he thinks, the European Central Bank (ECB) has a particular, nasty motive—targeting Italy for the treatment Greece received:

“The ECB is turning down the spigot in tandem, but largely for political reasons. The economic rationale is weak.... The Eurozone economy has slowed to stall speed....

“The end of QE in Europe is doubly treacherous because it rips away the ECB shield for Italy. Mario Draghi’s ‘do whatever it takes’ no longer holds. There is no sovereign backstop except on political conditions that Rome will not lightly accept. Bond markets are certain to test this.”