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Rising interest rates could unleash financial instability in 2023
Banking systems are more robust than they were in 2008, but a real estate slump could severely affect heavily leveraged private equity firms, producing a systemic crisis
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Britain's recent financial misfortunes demonstrate the kind of unknowns that could pop up as global interest rates increase, says the author.
PHOTO: REUTERS
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Kenneth Rogoff
(PROJECT SYNDICATE) – The fact that the world did not experience a systemic financial crisis in 2022 is a minor miracle, given the surge in inflation and interest rates, not to mention a massive increase in geopolitical risk. But with public and private debt having risen to record levels during the now-bygone era of ultra-low interest rates, and recession risks high, the global financial system faces a huge stress test. A crisis in an advanced economy – for example, Japan or Italy – would be difficult to contain.
True, tighter regulation has reduced risks to the core banking sectors, but that has only led to risks shifting elsewhere in the financial system. Rising interest rates, for example, have put huge pressure on private equity firms that borrowed heavily to buy up property. Now, with housing and commercial real estate on the cusp of a sharp, sustained drop, some of those firms will most likely go bust.
