Where will the next financial crisis come from ?
Events of the past year suggest emerging markets are the place to look. We've seen two wobbles already, first in May last year when the US Federal Reserve started talking about reining in quantitative easing, then in January this year when the "taper" actually started.
Sure enough, the International Monetary Fund's biannual Global Financial Stability Report provided some scary statistics on potential frailties. In the IMF's "severe and adverse" scenario – meaning steep rises in borrowing costs, perhaps triggered by capital rushing towards the US, and sharp falls in profits – the corporate debt classed as "at risk" in emerging markets could increase by $740bn.
Put another way, companies could struggle to service 35% of total debt. That's an average: in some countries, such as Brazil, the ratio would be higher.
But the top risk? The IMF report is actually more alarming on the state of the eurozone banking system. Six years after the start of the financial crisis, the IMF reports that the stock of non-performing loans has doubled from the start of 2009 and now stands at €800bn. The bulk of this is corporate debt. The "weak tail" of exposures, defined as loans to firms whose pre-interest earnings are less than their interest expenses, is 20-30% of corporate debt in Italy and 30-40% in Spain and Portugal, according to 2012 data.
Thus the plea from the IMF to the eurozone to "complete the job" of repairing banks' balance sheets to lessen the weight of bad loans and encourage credit to flow, especially to smaller companies.
If anything, though, the problem is getting worse. "Deleveraging has been accelerating in recent months as institutions have shored up their balance sheets ahead of the ECA [the regulator's comprehensive assessment, or stress test]," says the IMF report.
Do eurozone politicians and bank regulators have the will to break the cycle? As many, including former chancellor Alistair Darling, point out, the eurozone banking union looks desperately under-powered given the size of need for fresh capital.
These may seem churlishly gloomy thoughts on a day that Greece was able to borrow money in the bond markets for the first time in four years. Yes, that event is definitely a tribute to Mario Draghi and European Central Bank's fire-fighting powers. But suppressing a crisis, and tackling its legacy, are different things. The hard fact is that the eurozone, or a large part of it, still lacks a banking system capable of supporting growth. That still looks to be the big risk out there.
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