Economic, banking and financial crises

Image: Vitaly Kushnir


A severe economic crisis, or the collapse of multilateralism, could well lead to a new banking and financial crisis.

A new international economic crisis is clearly in the perspective of many commentators.[I] Growing problems in the banking systems of several countries, in the United States with the Silicon Valley Bank and then with the First Republic Bank, in Switzerland with the rescue of the Credit Suisse, and in Germany with the Deutsch Bank, revived fears of a major financial crisis, as in 2008-2009. But there are other problems on the horizon, such as slow growth in European Union countries combined with rising public debt, as well as a sharp slowdown in the US economy.

This comes at a time when economies have yet to fully recover from the Covid-19 crisis and are struggling with inflation not seen since the 2008s. Finally, the progressive fragmentation of international trade relations, a process that has been dragging on since the end of the 2009-XNUMX financial crisis, but which has accelerated sharply with the sanctions adopted by Western countries against Russia, worries both international organizations and economists .[ii]

This last problem is linked to the erosion of American pre-eminence, which is now challenged by China's rise to the top and the growing power of India and, more generally, the emergence of the group of countries known as the BRICS. All this adds up to many potential causes of crisis. However, these different problems are not all situated in the same temporality. Their conjunction remains hypothetical, although their existence is sufficient to create widespread concern.

It is clear, therefore, that the world economy has entered a zone of great instability. But this does not necessarily mean that this instability will lead to a major global crisis.

When do international crises arise?

It is worth remembering that the major international crises, whether the Asian and Russian crises of 1997-1999, the dot-com bubble of the early 2000s or the subprime mortgage crisis of 2008, occurred in situations of relative economic euphoria.[iii] That is why these crises, which could have been limited, took on the dimensions they did. The period of euphoria that preceded the crisis created an environment conducive to a relaxation of attention by public and private decision makers and a weakening of regulatory institutions.

In late January 2008, Koudrine, then Minister of Finance of the Russian Federation, mocked the difficulties of American banks and praised Russia as a “haven of peace” in the financial world. This was true in January 2008, but it was clear that he had not understood that if the banking crisis came to the United States, its consequences would be global and that no country could escape it. That's exactly what happened when the Lehman Brothers went bankrupt in September 2008. In the general panic, Western banks massively withdrew their capital from Russia, which was also facing a sharp drop in the price of oil as a result of the collapse of solvent demand. Economic or financial euphoria is often a bad adviser.

Today, the least we can say is that the climate is not one of euphoria. The international situation is clearly worrying: from the crisis induced by Covid-19 we have moved to an inflationary crisis, the effects of which are still being felt; from this inflationary crisis to a large-scale geopolitical crisis linked to the conflict in Ukraine. But euphoria is not the only thing that can be bad advice… The multiplication of problems can also monopolize the attention of policy makers, because they have to manage the consequences on a day-to-day basis and thus distract them from the main problem.

The question then becomes how to identify the main problem.

The international banking and financial system tops the list of problems from the perspective of economists. The banking system naturally appears on the list of “usual suspects”.

This system faces multiple problems. Faced with a very strong rise in inflation, central banks, led by the US Federal Reserve, raised their rates significantly and quickly. This provoked what I call a bond crisis because, given the high proportion of bonds in banks' portfolios, they became financially weak. Now, this led depositors to withdraw their money from these banks, which caused the collapse of SVB and the disastrous situation of many other banks.

It is clear that the rise in central bank interest rates has weakened the entire banking system. However, the regulation of this system, enthusiastically agreed upon during the dark hours of the 2008-2009 financial crisis, was only partially and imperfectly enforced. Quasi-banks remain largely unregulated and their operations sound quite adventurous. As a result, banks also took adventurous positions when interest rates were very low, which explains their fragility when interest rates suddenly rose again in the US and Europe.

Finally, any major economic disruption, be it an increase in business failures or a severe disruption of capital flows, is likely to weaken a weakened system. Added to this is the fact that the IMF seems to have gone back to its old ways and advocates fiscal consolidation, which will be dangerous for many countries where economic growth remains very fragile after the pandemic, with obvious consequences for banks. So there are good reasons why a major concern persists.

But the banking system is arguably the most obvious “usual suspect”; for this very reason, because it is so obvious, a general crisis is in fact unlikely. Central banks are alert and prepared to react in the event of a major shock. Of course, it is to be feared that a proliferation of crises in medium-sized banks, in the United States or in Europe, would lead to a saturation of the attention of central bankers, preventing them from reacting effectively when a bank considered “systemic” is put into jeopardy. cause. Therefore, this hypothesis cannot be completely ruled out.

Disturbances in European economies

This brings us to the second of the “usual suspects”: the state of the European economy caught between the inflationary crisis and the energy crisis. The energy crisis threatens the countries of the European Union in particular. That is why, according to a study by the Breughel Institute, around 798.000 million euros were spent during the winter of 2022-2023, more than they spent to respond to the Covid-19 crisis.

As a result of these expenditures and a relatively mild winter, the crisis will be relatively painless during the winter of 2022-2023. But it is unlikely that such spending can be repeated regularly without causing a dramatic buildup of national debts. As for the inflationary crisis, although the peak of inflation passed in early summer, inflation will remain high globally for what is likely to be quite a long period. Core inflation is rising in many countries.

Furthermore, it seems that this persistent increase is due to the fact that large companies try to increase their profit margins indiscriminately. Against this, monetary policies are, in general, very ineffective. However, it is these policies that mobilize, or will mobilize, governments and the IMF. There is therefore a significant risk that inflation will combine with very weak growth, or even recession in some countries, a combination that generally does not bode well.

Added to this is a situation in which governments try to control inflation with inadequate instruments, which would cause significant recessive pressures that would increase the public debt index and make financing even more difficult. A public debt crisis in several European Union countries cannot be ruled out, and its consequences would be much more serious than the Greek crisis of 2015. If a crisis of this type were to break out in several countries simultaneously, for example in Spain, France and Italy, the economic consequences could be profound not only in the European Union but also internationally. This crisis would be the starting point of a more generalized crisis.

Risks of disruption to international trade

Finally, the third of the “usual suspects” is none other than the implosion of multilateralism and the fragmentation of commercial and financial relations in the world. Also contributing to this trend are the appeals to "friendly shoring” that is, the relocation of certain essential productions, which normally respond to the interests of certain countries.

The formation of the BRICS, a real and effective challenge to US leadership by China, but also by India, is contributing to this implosion of a multilateralism that has undoubtedly ended. But there is a big difference between considering that this retreat from multilateralism, which is good in itself, will take place over a very long period, allowing the establishment of a new system of exchange between countries, and considering a rapid collapse of international trade as a result. Western sanctions and the formation of rival blocs.

Given the interpenetration of economic systems and the internationalization of value chains, here too the consequences would be potentially serious. This is a political issue. As long as Western countries seek to impose “their” bloc and their views on major issues in international politics, and as long as they believe that trade and financial flows can be used to achieve their ends, the creation of a bloc of countries opposed to these Western countries it's inevitable. What is at stake is the “de-westernization” of the world, which is already a fact and will only develop more and more from now on. It is the actions of Western countries that threaten to accelerate the process of deglobalization until it becomes uncontrollable, thus provoking an international crisis.

It is certainly the first time in many years that the world economy has been threatened by three crises, each with different origins but all with similar consequences. A severe economic crisis, or the collapse of multilateralism, could well lead to a new banking and financial crisis. The latter, in turn, will undoubtedly exacerbate recessive tendencies and therefore the debt crisis and the implosion of multilateralism. Certainly, the worst is not certain. The banking crisis unfolds in a few days. The economic and debt crisis persists for several months. The multilateral crisis can last for several years. The critical moments of these crises are therefore different.

However, the novelty of the current situation is the possible combination of these crises in the very short term. This is the main risk. If each of these crises can be approached separately, the phenomenon of saturation of the cognitive and decision-making capabilities of decision-makers, be they governments, central bankers, large international institutions or even leaders of multinational companies, makes it very unlikely that relevant responses to these three crises can be found.

*Jacques Sapir, economist, yeah director of research at the École des Hautes Études en Sciences Sociales (EHESS) and at the Center d'Étude des Modes d'Industrialisation (CEMI-EHESS). Author, among other books, of Sort out of capitalism out of disaster.

Translation: Eleutério FS Prado.

Originally published on the publisher's blog The old mole.


[I] Boskin MJ, A World of Unwelcome Replay. Project Syndicate, April 28, 2023,

[ii] Georgieva K., Confronting Fragmentation Where it Matters Most: Trade, Debt and Climate action in IMF Blog, January 16, 2023,

[iii] Pavicevic A., BRICS expansion: Five New Members in 2023?, in IMPACT, July 18, 2022,

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