Very dark clouds are visible on the horizon of the global market at the beginning of 2015. Does this mean we should expect a catastrophic financial storm? The clouds that may indicate possibly devastating quantities of rain are: A crisis of overcapacity and financial instability that might provoke the implosion of the internal market in China and affect the recovery of global demand; A collapse in the price of oil that might provoke the default of loans and investments in the sector, resulting in a global financial situation not so different from the 2007-08 crisis; A rise in the cost of the dollar that might provoke both a crisis in the stock market and the default by many emerging nations which issued debt notes in dollars when the value of this currency was expected to stay low for a long time; The possibility of irrational actions by Russia in response to sanctions that are seriously destabilizing its economy and internal financial market; A possible breakdown of the Eurozone depressed by the difficulty of activating reflationary measures.
These, and other, clouds look very dark and the possible combined effect of them all could be globally catastrophic. But expecting the worst implies that the Central Banks and Governments will not be able to react to the risks that are becoming more and more obvious. Is this true? On the one hand, the level of international cooperation which prevents and minimizes risks of destabilization is decreasing because the international market fragments
into regional blocks and each block, or mega-nation, prioritises its own interests without correlating them with the rest of the system. This means that the G-20 governance might not work. However, Central Banks and Governments do still tend to cooperate in order to avoid worst case scenarios when they become evident. This means that whilst international convergence is less than perfect, it still exists, because the nations involved understand their interdependence. Furthermore, some national risks may be more manageable than it currently seems. In China there are enough financial resources for limiting the crisis: Beijing will not be able to abandon its unsustainable export-led model in favor of a more solid consumptionled one, but economic growth, although slow, will not necessarily collapse. The fall of the price of oil is destabilizing but some compromise to contain this reduction is likely to occur among its main producers. The FED is fully aware that the move toward a less expansive monetary policy is full of risks and is showing an appropriate prudence. Moscow, though aggressive, is signaling that it will not trespass limits. The ECB is aware that without some strong reflationary move the Eurozone will be gone and will act accordingly. In conclusion, I expect rain but not a typhoon. Therefore, though wet, the global market will continue to grow.
