Iran and Global Debt Cloud IMF-World Bank Meetings

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1:25Do that. Do that. Do that with Acrobat. Learn more at adobe.com slash do that with Acrobat. Bloomberg Audio Studios. Podcasts. Radio. News. After nearly seven weeks of war in the Middle East, the flow of oil and other goods through the Strait of Hormuz has been reduced to a trickle, and the global economy is showing signs of strain. On Thursday, President Trump announced Israel and Lebanon have agreed to a 10-day ceasefire. But the future of that conflict and the war in Iran is still uncertain. It's against that backdrop that central bankers and other policymakers from around the world are gathering this week at the spring meetings of the International Monetary Fund and the World Bank in Washington, D.C.

2:13Kristalina Georgieva is one of the hosts of this week's meetings. She's the managing director of the IMF. And at a news conference, she warned more pain is coming for the global economy. If the conflict persists and oil prices stay high for an extended period, we must brace for tough times ahead.

2:34Stephanie Flanders:I think there's a sort of mixture of they're depressed and they're, I think, irritation, at least some of the finance ministers that are moving in the central bank governors that have been flying in. Stephanie Flanders is the head of economics and politics at Bloomberg and hosts the Trumponomics podcast. She flew in from London to cover the meetings and says the mood in Fonky Bottom is bleak. There's definitely a sense of frustration and now a barely suppressed sort of depression at the fact that all their forecasts are being torn up by a conflict that they would not have chosen and many of them still don't understand.

3:11Look, I think I would add foreboding to the depression. Sean Donnan is a senior writer for Bloomberg Economics. They are looking out at the global economy and they really feel like we're only just now seeing the beginnings of the impact of the Iran war. The other thing I would say is it's not just irritation at the U.S. that you're hearing from finance ministers. is also some irritation at the markets, who policymakers, central bank governors, finance ministers, lots of people on the sidelines, and I've heard this at dinners this week, I've heard this in public meetings, I've had it in conversations as well.

3:47There's just this real feeling that financial markets don't get how bad this is, and that we are going to see some serious damage in the global economy, and that this is going to drag on for a good long while. On Tuesday, the IMF slashed its growth outlook for the year, saying it now expects global GDP to increase by 3.1 percent this year. Back in January, the IMF forecast 3.3 percent growth. That revision down reflects the major energy shock caused by the Iran war and the possibility of a downturn if the conflict drags on. It also assumes the conflict will be relatively short-lived. If it lasts longer, the IMF warns, the world could come close to experiencing a recession.

4:32Stephanie Flanders:What was striking, I mean, those of us who spend probably too much time looking at forecasts, when you get a range, it's normally you get the kind of middle of the range, and then there's the upside and the downside scenario. I was kind of struck by the fact that the IMF is producing the sort of baseline, and then there's the worst scenario, and then the even worse scenario, which sort of captured the fact that they didn't see much potential upside risk in this situation. I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, the alarm bells going off in Washington as the IMF and the World Bank hold their spring meetings, and why the tools the world uses to deal with financial crises may be the weakest they've been in decades.

5:19Sean, you've been reporting on the current capacity of governments and institutions to absorb a financial shock. So let's start with the bottom line here. How ready are they? Well, look, I mean, people talk about the global safety net at meetings like this. And what they're really talking about is government's fiscal capacity to respond to whether there's money in the budget to throw some money at a problem when the problem surfaces. Monetary policy, what central banks can do, whether they can lower rates, how they can address things, and then the capacity of the IMF and the World Bank and so on.

5:55You talk to people and we talk to – for a story that we did for Business Week magazine, we talked to Carmen Reinhart who has looked at centuries of financial crises and she says, we're at the worst place we've been globally in terms of preparedness to respond to a crisis since before the global financial crisis and possibly as far back as the 1980s. And what she's really thinking about is coming out of the pandemic, governments spent a lot to respond to that emergency. They took on big debt loads to do that. They haven't repaid that debt. There is no fiscal space, to use the kind of IMF terminology.

6:33So we're being hit by these shocks in terms of energy price, But governments don't really have any ammunition to respond or much less than they do. Then you look at the monetary policy stuff and Carmen Reinhart tells us, look, in the past, we looked to central bankers to be the heroes in crises, right? They would rescue the global economy from things. We put them on the front page of newspapers and covers of magazines. And this time around, they're stuck because not everyone's gotten rid of the inflation from the last time around. So that kind of tells you that you still want to raise rates when gas prices go up and they feed into more inflation.

7:13But if this is going to hit growth hard, then you might want to lower rates. So this is kind of stagflationary shock is what people talk about. And that's just something that's really hard for central banks to do. The IMF and the World Bank, they still have some capacity to respond, but they also are kind of entering this crisis with less credibility than they had in the past. You know, if we think back to the global financial crisis of a pandemic, the idea of a U.S.-led rescue plan for the global economy or the G20 getting together and coordinating action, there's just a feeling that that's not going to happen this time around.

7:54So we've got a crisis that seems to be brewing here and it's happening in the context of a world that's not in great shape to respond to a crisis.

8:05Stephanie Flanders:And just on the sort of double whammy that you have when you talk about the lack of so-called fiscal space, public debt has ratcheted up in one big step after the global financial crisis and then another big step, as Sean points out, after the pandemic. The key thing that's changed since then is obviously the cost of servicing that debt has gone up. So you had a period after the global financial crisis where public debt as a share of GDP across OECD countries, across the advanced countries, I think doubled as a share of GDP roughly. And the cost of servicing that debt actually went down because interest rates had fallen so low.

8:37Stephanie Flanders:We're obviously in a very different environment. It is making an enormous difference day to day to the capacity of governments to respond. And you had even an auction this week of UK debt where they were paying very close to 5 % on that debt, which is the highest it's been, I think, since the global financial crisis. And just to add to the gloom even some more on debt servicing costs, I mean, there are – according to the UN, there are something like 3.5 billion people out of 8 billion total who live in countries that spend more on servicing their debt than on education and healthcare nowadays.

9:11is. Stephanie, Sean brought up the Carmen Reinhart comment. And I wonder if, as you look at the moment that we're in right now, is there an historical analog that you gravitate toward that strikes you as similar to the one that we're living now? Is it the 70s with the oil shocks, for instance?

9:26Stephanie Flanders:I think what people will always say is that there's mixtures of everything, but I think we're certainly more in a 70s scenario, supply side shocks, of which obviously the oil shock in the 70s was the big example. Most of us, ancient though we are, David, don't really have a great memory of the early mid-70s. And the crises that we tend to have remembered have been more about shortages of demand. And we've seen central banks and policymakers respond to a lack of demand in various ways. But the biggest change is the degree of international cohesion. You know, you can exaggerate how much difference something like the G20 made in the context of the global financial crisis.

10:07Stephanie Flanders:But the fact that there is so much disagreement about, you know, what the reasoning was to go into the Iran war, whether there should be international sort of approaches to international debt, for example. The fact that there is now so much disagreement on these things, I think does make this a particularly difficult time. And I guess takes you a little bit more back to the kind of 1920s, 1930s, without exaggerating those parallels.

10:40After the break, what tools do the IMF and the World Bank have at their disposal? And what can those institutions do to help a more fragmented, debt-burdened global economy respond to a financial crisis? Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies.

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13:12The energy shock the Iran war has brought about comes on the heels of two big moves by the Trump White House that have rattled global markets and upended the world order. One, the whipsaw of the president's trade policy. And two, the United States' retreat from multilateral institutions. Stephanie, you host the Trumponomics podcast here at Bloomberg, which, as you put it, and as loyal listeners will know, looks at the economic world of Donald Trump and how he is shaking the global economy. In terms of the world's readiness for a financial crisis, how have the last 15 months or so kind of changed the calculus?

13:46Stephanie Flanders:I mean, it's interesting, right, because we started by talking, Sean mentioned the irritation with the markets. I'm not sure at Bloomberg we're ever allowed to be irritated by the markets but we could certainly be bemused and intrigued by the confidence of the markets in the face of such potentially alarming economic news coming down the track. So one of the striking things is that we haven't seen a lot of warning signals flashing in the markets and the fact that the main indices are kind of back to where they were before the Iran crisis began I think is a source of sort of surprise and head scratching, to put it mildly.

14:23Stephanie Flanders:When we think about what would constitute a financial crisis, you know, I guess one thing that you can fall back on is it is very much public debt that is, if you like, the problem, or at least the thing that feels most likely to cause an issue, at least in most countries in the world. Private balance sheets, with some exceptions, are actually in relatively good health. So I would say, although the politics seems very dysfunctional, although governments are under enormous strain, I think we're in a slightly better position in terms of private balance sheets. And even, I would say, the sort of state of financial balance sheets to withstand a crisis, even though the signs are not there yet, because there's just such determined optimism by all those investors.

15:08You mentioned those balance sheets. I wanted to ask you about another sort of potential bright spot here, and that is that the U.S.'s position, Stephanie, in the global energy market. There is so much concern about the rising price of crude. The U.S. is in a markedly different position than a lot of countries in the world.

15:23Stephanie Flanders:Yeah, and I started off, I think, I mean, Sean and I have a slightly different view on this, and I think I would like to sort of, he will be able to sort of respond to what I said. But I think, you know, one of the interesting things about the dynamic in Washington and at these meetings is that you have the IMF putting out a scenario which goes very quickly from like a baseline to an adverse scenario, even in the course of a press conference. But the one country whose forecasts are barely being downgraded in terms of growth is the US, is the country that has, in a sense, caused all of this economic damage.

15:56Stephanie Flanders:And even more strikingly, although we're very focused on the gasoline price, and people who are off trying to fill up the tank in the US are very clear about the rising gasoline price. The natural gas price domestically has actually fallen significantly in the US, even as this crisis has been happening. It's fallen about 20 % since last year, and slightly less than that since the start of the crisis. That is the source of energy that is now very plentiful in the US, the US being an exporter of energy, which is driving a lot of manufacturing and gives the country an enormous competitive advantage at this point.

16:32Stephanie Flanders:So although there's going to be a lot of political and some household economic damage from this, you know, it is not lost on the IMF and the other countries at this meeting that actually, in other ways, the US is in a very strong position to ride out this storm. Sean, you're not persuaded? No, I just think I am always persuaded by Stephanie's arguments. But I think it's... Me being your boss makes a difference to that, I imagine. It's hard to disagree with your boss. But look, I do think it depends where you look at the economy. If you are a farmer who needs diesel, your inputs have just gotten a lot more expensive.

17:08That tractor, you're going to want to run it a lot less. So the farm economy is going to take ahead. If you make anything that has plastics in it, whether it's a toy or a phone case or anything else, that's just gotten a lot more expensive. If you are reliant on Gulf capital for an investment that is happening in the US, I would argue you've got new questions about whether that capital is going to be forthcoming. And then there are some longer term questions. Alexis Crowe, who's a very smart economist at PwC, made the point to me yesterday as we were sitting having a coffee at the IMF headquarters that people aren't thinking about the potential impact of this on the AI boom.

17:56There's a very real possibility that in a matter of months, production of chips is going to become a lot more expensive. You may see some curtailing of chip production. That may add to memory chip shortages, which may then feed through into the U.S. economy in different ways. You know, maybe in the U.S., the damage for Donald Trump is not economic per se at the kind of aggregate level. But certainly politically, this is not something that is going to help the Republican case in the midterm elections. That adds to volatility, political volatility in the US, which hasn't historically been very good for the economy either.

18:39Stephanie Flanders:And then the beautiful synthesis of both of our views is, and I think also it goes to some of the discussion at the World Bank, is all of what Sean says, I'm sure, is right. The disconnect or the contrast with the countries around those various tables in the World Bank is they're feeling the pain now or they can see it coming at them. And they are nervous that not enough of that short-term economic pain is going to be felt by the US. and given that the U.S. is the main force that can actually influence the length of this crisis, if there's a lack of urgency in the U.S., that is deeply troubling to the rest of the world.

19:17I just want to wrap up by talking about the state of these two institutions. So, Sean, let me start with you. You said a bit earlier that there are kind of questions about the lessening of credibility when it comes to the IMF. What's the state of the IMF in the World Bank today? The state and the most important thing to think about when you are thinking about these big multilateral institutions is their biggest shareholder is walking away from multilateralism as an idea. And, you know, there is a really interesting dissonance between what the IMF is saying about the economic impact and what Scott Besson, the Treasury Secretary, is saying about the economic impact of the war, kind of just saying, well, you know, it's all worth it and we shouldn't worry about it too much.

20:04And the rest of the world is worrying about it. You know, the IMF and the World Bank always have come good in a crisis, you know, and we're going to see if that happens again this time. I suspect that they will. But every crisis we've been through recently, it feels like the IMF comes out just a little bit weaker than it was going into the O &M. You know, going to these meetings is a little bit like going to the doctor and listening to all the sensible advice that you should take. And it kind of, and it's all in a, sometimes it feels like in an alternative world, right? So the advice this week is if you are going to help your people and if you're going to help them, whether the impact of high energy prices, then make sure it is targeted and limited and that you make sure you pay back the debt and that you don't give it to everyone, right?

20:54And of course, that goes against good politics in a lot of these countries, right? When you have people in the streets in places like Ireland, right? When you have Australian farmers complaining about diesel prices and putting pressure on the government and so on. And when you look at countries like the Philippines and Thailand that are really feeling the impact of this heavily, it's going to be hard for them to take that advice. And so fast forward a few years, we come out of it, you know, the IMF may have been right, but it will have lost a little bit of authority because, again, it kind of offers its advice in this kind of pure world of gray -suited technocrats, although there are some blue suits at the IMF.

21:40Stephanie Flanders:I guess the only, if you're the IMF and the World Bank and you're looking at what's happened to some other institutions that potentially the Trump administration could have had in their sights, you might also feel after a year at least that you've dodged a bullet, that you're not, you might have expected a few more broadsides, more attempts either intervening into IMF World Bank policy or indeed threatening to leave. We've had all of that from the administration in other areas. So the fact that the IMF and the World Banks are still constituted as they are, that the US has not involved itself, is yes, it's a negative.

22:19Stephanie Flanders:Certainly from the times when I was working at the US Treasury during the Asia financial crisis, where the criticism was always that the US had too much control over these institutions. The fact that they have largely ignored them, I suspect the heads of the institutions will be a little bit relieved, even though, as Sean says, the long-term cost is they have less capacity to respond to crises like the ones that are potentially coming down the track now.

22:53This is The Big Take from Bloomberg News. I'm David Gurra. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. Thanks for listening. We'll be back tomorrow.