What are the key indicators of an international financial crisis?

Exchange rate volatility is an important concept and can be the difference between you paying fair market price and potentially overpaying if you don’t have a good metric to assess FX volatility.

While FX volatility can signal potential financial distress, the global ramifications largely hinge on the involved currency & country significance in int’l trade/finance. Argentina & Venezuela experienced severe devaluation & inflation in the 2010s & 2020s. Per World Bank data from 2021, Argentina's inflation rate hovered ~50%, & Venezuela's >2000%. Despite this, a global financial crisis did not ensue. Why? Neither the peso nor bolívar are central to global financial system. The scale & influence of a country's economy & its currency play pivotal roles. A sizable devaluation in a globally dominant currency (e.g. USD), would surely have implications - global impact is contingent on the strategic importance of the currency and country.

Unconsciously, globalization can be the cause of financial crisis. Globalization make each country will have high dependency with other countries especially for raw materials, transportation, etc. The value of the seller's currency is likely to be determined by the extent of dependence on the buyer. When there is a substantial dependency on the buyer, the seller has the ability to raise the product's value, consequently influencing the currency's value as well. The strengthening or weakening of the currency depends on the volume of orders the seller receives from buyers.

Identifying an international financial crisis from an economic perspective can be challenging until it has already taken place. However, once the crisis is underway, its impact becomes painfully evident to those bearing the brunt of its consequences. Signs of such a crisis include drastic currency fluctuations, imbalances in supply and demand, inflation, deflation, banking clearing issues, and numerous other indicators. Governments must remain vigilant to ensure that financial crises are averted.

Exchange rate volatility is most problematic when the country's debt is denominated in a currency that is not of that sovereign. This was illustrated most acutely in the various emerging market crises back in the 80s and 90s when EM debt was often denominated in dollars

High inflation or hyperinflation is indeed one of the key indicators of an international financial crisis. Rapid and sustained increases in prices erode the purchasing power of a country's currency, leading to economic instability and causing a range of issues, including reduced consumer purchasing power, uncertainty for investors, and often, social unrest. Hyperinflation can be a severe symptom of underlying economic and financial problems, and it is a significant warning sign that a country may be heading towards or already experiencing a financial crisis. Monitoring inflation rates is crucial for assessing the health of an economy and identifying potential crisis situations.

Usually it is the other way around - inflation and debt problems are the trigger for exchange rate volatility. And important to bear in mind that in some cases, a strengthening currency can also hurt competitiveness, for example, like what happened in the past in the Swiss franc and Chinese yuan, leading to currency intervention.

one most political ideology and relationship with G7/G20 members countries to provide knowledge technical knowhow. Once you have sufficient funds for CAPEX. More employments will generate and less dependent. Other situation wars ,pandemic, politically internally instability. Once you have all positive in your financial situation. your currency will gain in forex market. Currency reserve is sufficient and Imports Exports balance to maintain to reduce currency outgo.

In my experience, exchange rate volatility is indeed a crucial indicator of an international financial crisis, exemplified by events like the collapse of Long-Term Capital Management (LTCM) and the Asian Financial Crisis. During the Asian Financial Crisis, numerous Asian currencies depreciated sharply as confidence eroded, causing inflation, debt issues, and social unrest. Meanwhile, LTCM's crisis demonstrated how a single entity's losses could trigger a global panic, leading to a flight to safe-haven currencies and destabilizing exchange rates. Exchange rate volatility can serve as early warnings, revealing underlying vulnerabilities in a country's financial system or broader global economic uncertainties.

Another key indicator is a subtle or direct devaluing or revaluing of the currency. This can happen in a number of ways including an announcement that they are doing it or a massive change in the issue of country debt or purchasing of country debt. Type of actions, can lead to a sudden change in the exchange rate.

Beware of capital flow reversals as a telltale sign of an international financial crisis. A sudden outflow of foreign capital can trigger liquidity issues, credit contraction, and plummeting asset prices. Keep a keen eye on the health of international investments to anticipate potential crises and respond proactively.

This is an interesting indicator of a financial crisis and a trend that is attributed to either the country's deteriorating financial condition or investors flight to safety due to geopolitical tensions and uncertainties in the global economy, a contagions effect. Emerging economies are more affected with the latter as witnessed during the GFC and COVID. Hence the need to build a resilient domestic economies with less reliance on Foreign portfolio Investments and other volatile inflows that could disrupt the country in times of crisis and possibly lead to another crisis.

BlackRock witnessed the effects of capital flow reversals firsthand during the 2008 financial crisis. Prior to the crisis, the U.S. experienced substantial capital inflows due to its attractive investment environment, with many foreign investors pouring money into the American housing market. This influx of capital contributed to the housing bubble's inflation. However, when the subprime mortgage crisis struck, it triggered a massive loss of confidence among investors. As a result, there was a rapid outflow of foreign capital from the U.S. Monitoring global economic indicators, understanding geopolitical shifts, and having contingency plans in place become paramount in such volatile environments.

Balance of Payments Crisis: Persistent current account deficits, especially when financed by short-term capital inflows, can strain a country's external finances. A sudden reversal of capital flows, leading to a balance of payments crisis, is a red flag.

The Mexican Peso Crisis of 1994 offers an example of a sudden reversal of capital flow. Mexico experienced a substantial inflow of foreign capital, particularly from the USA, driven by high-interest rates. However, when investors' confidence wavered, partly due to concerns over Mexico's financial stability and political turmoil, capital quickly reversed. This outflow led to financial instability and a severe economic downturn. The Mexican Peso Crisis underscores how sudden shifts in capital flows, whether triggered by economic vulnerabilities or external factors, can swiftly transform a seemingly robust economy into a crisis-stricken one, highlighting the need for vigilance in monitoring these fluctuations.

Poor financial management and bad economic policies can lead to current account deficits, especially those financed by short-term capital flows. A sudden shift in the balance of payments can lead to a crisis. This can gradually lead to high levels of government debt. When it exceeds a country's ability to service it, can raise concerns about default risk and contribute to a financial crisis. This is what happened with Sri Lanka recently.

Very true! When a country seems appealing, it can attract a flood of foreign money for various investments. This can jazz up its economy, credit options, and asset values. But, if a country faces a bad shock, altered expectations, or gets caught in another crisis's ripple effect, it might see a sudden outflow of foreign capital. This can lead to a cash squeeze, credit squeeze, and asset value slump.

Capital flow reversals are a double-edged sword. Inflows can stimulate economic growth, but they also expose a nation to risks if they're primarily short-term or speculative. Sudden outflows, triggered by various factors, can unleash economic turmoil, leading to liquidity problems, credit constraints, and plunging asset values. As such, managing the composition and stability of capital flows is essential to safeguarding a country's financial resilience and reducing vulnerability to external shocks.

Definitely and what we saw happen in 2008 from the tri-party repo market. Market participants relied on it for overnight funding but when the cash lenders stopped, substantial systemic fragility ensued.

The fragility of the financial sector is a global concern, as exemplified by the European sovereign debt crisis in the late 2000s. Countries like Greece, Portugal, and Spain faced severe financial sector vulnerabilities, partly due to excessive government debt and weak banking systems. This fragility transmitted shockwaves throughout the Eurozone, undermining investor confidence and raising concerns about the sustainability of the Euro currency. The crisis underscored the critical role of a sound financial sector, demonstrating that inadequate regulation, weak supervision, and financial institutions laden with risky assets can lead to international financial turmoil.

Pay attention to the stability of the financial sector, a crucial indicator of an international financial crisis. Fragile financial systems, marked by excessive leverage, inadequate regulation, and poor transparency, are more susceptible to shocks and contagion. A resilient financial sector is essential for economic stability and growth.

Leading up to the 2008 financial crisis, Lehman Brothers had excessively leveraged its operations, with reported leverage ratios as high as 30:1. This meant that for every dollar of equity, they had $30 in debt. Coupled with significant exposure to the subprime mortgage market, this excessive leverage left the firm exceptionally vulnerable. When the housing bubble burst and mortgage defaults surged, Lehman's assets plummeted in value, and its liabilities became untenable. Despite attempts to secure capital or a potential buyer, the firm declared bankruptcy in September 2008, becoming the largest bankruptcy filing in U.S. history.

Think of the financial sector like the heart of the economy. When it's strong, it pumps money where it's needed and helps the economy grow smoothly. But when it's not healthy, it can make things go haywire. Some things that can weaken it are borrowing too much, not matching the timing of debts and payments, playing with different currencies, and not having good rules and supervision in place. When the financial sector is in good shape, it's like a sturdy heart that keeps the economy thriving.

Banking Sector Vulnerability: Weaknesses in the banking sector, such as high levels of non-performing loans, inadequate capital buffers, and liquidity problems, can precede or exacerbate a financial crisis. Bank runs or failures can ensue.

The shaky financial sector, so accurate. This sector connects savers and borrowers but can also magnify shocks and create instability when it's not in good shape. Factors like too much debt, poorly timed investments, currency issues, weak oversight, and a lack of transparency can make it vulnerable. A strong financial sector is the backbone of economic stability, while a fragile one can lead to trouble. It's like the foundation of a building – if it's weak, the whole structure is at risk

A fragile financial sector is a ticking time bomb. While a robust financial system can fuel economic development, a weak one can magnify shocks and propagate instability. Factors like excessive leverage, maturity mismatches, and lax oversight can erode financial stability. In times of crisis, these vulnerabilities can lead to bank failures, credit freezes, and systemic crises, underscoring the importance of stringent regulations, transparent practices, and prudent risk management to safeguard the global financial system.

Think of the financial sector like the engine that keeps the economy running smoothly. When it's strong, it helps money flow where it's needed, spreads out risks, and boosts growth. But when it's not in good shape, it can make problems worse. Things like borrowing too much, not timing debts right, or not following good rules can weaken it. And when the financial sector is shaky, it can make economic troubles spread like wildfire. So, it's crucial to keep it healthy for a stable economy.

In my opinion, the problem is with how the money is used inside the bank, and how much liquidity the banks and federal organizations keep, the more leverage they take on, the harder it becomes to pay back, increase in debt. US increased it deb ceiling, like who is US taking on debt from? Federal reserve? who will allow the country/government to borrow more money? fed reserve will print new money against bonds and securities issued by the government and then bought by the federal reserve at a said rate and then physical money exchanges hands. It is like money growing on trees, but that is what causes financial crisis, where the average human can not have infinite leverage, or leverage by providing sound logical reasonings. Crisis

Watch for signs of sovereign debt distress, a key indicator of an international financial crisis. Unsustainable government debt levels can lead to solvency issues, hinder access to credit markets, and erode public confidence. Monitoring and managing sovereign debt is crucial for economic stability.

For years, Greece had been amassing significant debt levels, partly driven by fiscal mismanagement and structural inefficiencies. By 2010, the nation's debt-to-GDP ratio soared to over 140%, making it increasingly difficult for the Greek government to secure financing from the global markets. As investor concerns grew regarding Greece's ability to repay its obligations, borrowing costs surged, with the yields on 10-year Greek government bonds reaching unprecedented levels. In 2015, facing insurmountable repayment challenges, Greece became the first developed country to default on an IMF loan repayment. The ripple effects were profound. Greek banks faced runs, capital controls were imposed, and economic activity was severely hampered.

Sovereign Debt Distress: High levels of public debt relative to GDP, coupled with an inability to service debt or refinance maturing obligations, can trigger a sovereign debt crisis. Credit rating downgrades and rising borrowing costs are warning signs.

I agree but focusing on global imbalance can be complicated. While imbalances can reflect structural disparities like savings, investment, and productivity differences between countries, they can also result from the benefits of globalization. Globalization facilitates international trade and capital flows, which can lead to disparities in current account balances. For example, a country with an account deficit might be importing capital goods for economic development, which can ultimately lead to improved productivity and economic growth. Global imbalances, while indicating disparities, can also signify the beneficial dynamics of globalization, as nations leverage their respective strengths to drive overall global prosperity.

Sovereign debt distress is most problematic when debt is denominated in an external currency. This was most acute in earlier times such as the EM debt crises in the 80s, 90s, and early 2000s and then in the Euro periphery in the early 2010s. In the former, EMs had dollar denominated debt and in the later they had Euro denominate debt, so they could not use exchange rate flexibility to address high levels debt, as they had currency misalignment between their assets/ income and their debts/external commitments.

This is a bit sad honestly. It's out of the hands of the common man. When the debt level is manageable, the government can keep the financial ship sailing smoothly, borrowing at fair rates and meeting its financial obligations. But when debt becomes unmanageable, accessing credit becomes a struggle, deadlines are missed, and trust erodes. This can lead to a sovereign debt crisis, affecting not only the government but also the entire financial system and public's confidence.

External debt levels have been on the rise for all countries since the 2008 global financial crisis. IMF estimates that at least 70 countries are at risk of debt distress and can likely default on loans. Many of them are frontier and emerging markets. What this means is these countries are more likely to face delays in economic development. They are also more prone to climate crisis since investments in this area will not be their priority. Unfortunately, this means some countries will likely remain in the vicious cycle of economic distress.

Sovereign debt distress is a critical barometer of a nation's fiscal health. Sustainable debt levels allow governments to fund essential public services, maintain credibility, and access affordable credit. However, excessive debt can lead to a debt crisis, jeopardizing not only the government's solvency but also the stability of the banking system and public trust. This highlights the need for prudent fiscal management and a balanced approach to public borrowing to avert the potentially devastating consequences of a sovereign debt crisis.

We have a global economy but it’s important to break up advanced economies from emerging markets, as they tend to have correlation between performance of currencies, assets, growth, etc.

China, with its vast manufacturing base and competitive pricing, amassed substantial current account surpluses by exporting a plethora of goods worldwide, especially to the U.S. Conversely, the U.S. racked up significant current account deficits, importing a vast array of products, while depending heavily on foreign financing, particularly from China. By 2008, China's current account surplus peaked at about 10% of its GDP, while the U.S. deficit hovered around 5% of its GDP. The influx of capital into the U.S. contributed to lower interest rates, fuelling the housing bubble. Meanwhile, China's massive foreign exchange reserves, heavily skewed towards U.S. assets, exposed it to the vicissitudes of the U.S. economy.

Keep an eye on global imbalances – persistent differences in current account balances among countries and regions. They can result from various factors, including savings, investment, and trade dynamics, and have the potential to escalate into an international financial crisis. Monitoring and addressing these imbalances is vital for economic stability and cooperation.

Global Economic Conditions: A weak global economic environment, characterized by recessions in major economies or reduced global trade, can lead to decreased demand for exports and diminished access to external financing, contributing to a financial crisis.

When a country consistently sends out more than it takes in, it's like living beyond one's means. These imbalances can happen due to various reasons, including differences in saving and spending habits or unfair practices. But no matter the cause, these imbalances can create tensions and vulnerabilities, making a worldwide financial crisis more likely.

Global imbalances are a complex web of economic interdependence. They can be driven by legitimate factors like disparities in savings, productivity, and demographics, but also by unfair practices such as currency manipulation and trade barriers. These imbalances, if left unaddressed, can breed tensions and vulnerabilities. They pose the risk of sparking an international financial crisis as they intertwine economies, making them susceptible to shocks and disruptions that can propagate across borders. Coordinated efforts and policies to address these imbalances are essential for global financial stability.

Global imbalances are like the scales of the world's economy tipping one way or the other. When a country sells more to others than it buys, it's like saving more money. But when it buys more than it sells, it's like spending more. These imbalances can happen for different reasons, like how much people save, invest, and work, or if there are rules that make trade unfair. Sometimes, these imbalances can cause problems that affect everyone, like a big economic crisis.

These imbalances can be a major indicator of potential financial crises. Current account balances, which measure the flow of economic activity between countries, can be a useful tool for identifying these imbalances. Large and persistent differences in current account balances between countries can signal economic instability and potentially lead to financial crises.

The quest for balance is complex and a continious struggle for all countries. Some countries will have more resources than others and thats why it is essential that we collaborate, each country bring something to the table and we all benefit from each other. However, the complex power play among a group will pose as a risk to the quest. Some countries will see themselves as contributing a larger share to the table due to natural and structural advantages, hence, an imbalance.

Absolutely. Leading Economic Indicators (LEIs) exist in every advanced economy and can accurately predict economic expansion or contraction in the next 12 months.

One of the best indicators is the inverse yield curve. Ie short-term interest rates above long-term (say 5-10 year bond) rates. I used it to predict the 2011 And interest rate volatility. I used it to predict the braking of the Greek crisis, and the start of the spill-over.

Stock Market Declines: Prolonged and severe declines in stock market indices can indicate deteriorating economic conditions and diminishing investor confidence, which may be linked to a financial crisis. Credit Rating Downgrades: Downgrades by credit rating agencies can indicate a country's deteriorating creditworthiness, which can affect its ability to secure financing. Commodity Price Shocks: For commodity-exporting countries, sharp declines in commodity prices can strain government revenues, affect trade balances, and exacerbate financial vulnerabilities.

Identifying and interpreting the indicators of an international financial crisis is a complex task. These crises tend to be multifaceted with varying causes and interacting variables, presents a significant challenge. In my experience, building a diffusion index of key variables can be a useful early warning system. Employ a range of indicators, models, and scenarios to assess the likelihood and potential impact of crises. This approach empowers policymakers and market participants to not only monitor risks and opportunities systematically but proactively respond to evolving crises, enhancing the resilience of the international financial system.

Early warning systems are invaluable in our complex, interconnected financial world. Recognizing impending crises is challenging due to multifaceted indicators that interact in unpredictable ways. Early warning systems, by amalgamating data, models, and scenarios, provide a proactive approach. They empower policymakers and market players to track risk evolution, foresee potential shocks, and formulate well-informed responses, ultimately helping prevent or mitigate international financial crises before they reach catastrophic levels.

Identifying international financial crisis indicators can be challenging due to their complexity, diversity, and interplay. To address this, early warning systems, utilizing a blend of indicators, models, and scenarios, are crucial. These tools aid in tracking evolving risks, foreseeing potential crises, and planning responsive actions for both policymakers and market players.

Definitely, the 'Chicago Fed National Financial Conditions Index' (NFCI) tracks changes in financial market conditions, such as interest rates, stock prices, and credit spreads, to measure the degree of financial stress in the economy.

Some of the early warning signs include monitoring both the leading and lagging indicators. Especially the leading indicators like the stock markets, house prices, bond yields, production and manufacturing statistics, retail sales and interest rates. Analysing these factors with a combination of qualitative fundamentals will serve as warning signs of an impending crisis and help the policymakers make timely coursecorrection

Symptoms of such a crisis comprise substantial currency fluctuations, mismatches in supply and demand, inflation, deflation, challenges in banking clearing processes, and other indicators. Aside from symptoms, the globalization also can be a trigger for financial crisis. Globalization make each country will have high dependency with other countries especially for raw materials, transportation, etc. Buyer's dependency will likely dictate the value of currency of Seller. If buyer's dependency is very high, the seller can increase the value of product and ultimately the value of product can also affect the value of currency. The more seller receives purchase orders from the buyers, their value of currency will strengthen and vice versa.

Along with stress on the banks due to excessive corporate leverage. Excessive retail borrowing for non asset creation is also a metric to be considered.

Corporate Debt Levels: High levels of corporate debt, particularly when businesses are overleveraged, can make corporations vulnerable to economic shocks and pose systemic risks to the financial sector. Geopolitical Events: Geopolitical tensions, conflicts, and international events can disrupt financial markets, trigger capital flight, and undermine investor confidence.

Prolonged high interest rates (IR) can have multifaceted effects on the global economy. They dampen investment as borrowing becomes expensive, potentially slowing down economic growth. They can also exacerbate the debt burden of countries w/significant external debt, leading to solvency concerns. On a household level, expensive credit can reduce consumer spending. From a global perspective, countries w/high IR’s may attract foreign capital seeking better returns, leading to potential capital flow imbalances. These inflows can reverse abruptly if investor sentiment changes, causing financial market instability. In short, prolonged high IR’s, can act as a brake on global economic activity & exacerbate financial vulnerabilities.

Some key indicators that can signal potential risks that I will look at: - The 'Buffett Indicator' - a high ratio of stock market capitalization to GDP can indicate overvaluation and potential for a market correction. - Rising levels of debt, particularly sovereign debt, can signal an increased risk of default and financial instability. - Growing asset bubbles, such as in real estate or stock markets, can be a warning sign of potential crises. - Increasing volatility in currency markets and foreign exchange rates can signal instability and potential crises. - Political and economic uncertainty, including geopolitical tensions, can contribute to financial market volatility and increase the risk of crises.

Banking stress caused because of increasing NPA's will also trigger for downgraded performance. More specifically when these NPA's are a result of government decision. I believe this will put a question on the willingness of the government and solvency of the baking system as well.

I believe that the occurrence of any political turmoil in a country that has global logistical importance is an important indicator of the occurrence of signs of an economic crisis that will have a major impact on the global level.

No single indicator infallibly predicts financial crises due to the complex interaction of economic, political, and social factors. Crises can emerge from excessive leverage, asset bubbles, and systemic shocks, compounded by the complexity of interlinked financial systems. Human behavior, often irrational, and unforeseen 'black swan' events further obscure early detection. Hence, preparing for a crisis requires diversification, maintaining liquidity, managing debt, and staying informed. Continuous adaptation and having an emergency plan are key to weathering financial storms.

Asset price bubbles. The 2007-2009 crisis started from the housing bubble in the U.S and then escalated to other countries. It at first just creates internal financial stability then, lead to a larger loss for investors, banks, and household and in the end triggers a sharp contraction in economic activities.

From my perspective as a financial advisor with a background in international affairs, I believe that a financial crisis does not occur in isolation. It is often the result of a lack of cooperation between nations and is also influenced by traditional economic thinking, which perpetuates the idea of infinite economic growth on a planet with finite resources. It is unrealistic to expect the economy to grow indefinitely at the current rate. We need to strike a balance between economic growth and environmental sustainability to avoid unsustainable expansion and uncontrollable economic downturns.