US, Japan, 4 other economies may see financial crises in next 3 years: Nomura

NEW DELHI: In economics, there is a widely believed notion that in every boom, seeds of the next busts are sown. We are not out of the raging pandemic yet that has upturned the financial math of almost every country, and some analysts have started to sound the sirens of the next financial crises.

Nomura in a report said its proprietary indicator is warning that six economies – the US, Japan, Taiwan, Germany, Sweden and the Netherlands – appear vulnerable to financial crises over the next 12 quarters.

“Covid-19 forced central banks to cut rates to record lows and delve deeper into QE (quantitative easing), and most have maintained these extraordinarily loose settings despite growing signs of economic recovery,” said the Japan-based investment bank.

“This environment is ripe for debt-fueled asset price booms. At some point, however, the imbalances will unwind, usually abruptly, which can cause a credit crunch or, worse still, a financial crisis,” it added.

Nomura used five sets of data – the ratio of private credit to GDP, the debt service ratio, real equity prices, real property prices and the real effective exchange rate – to form a composite early warning indicator, ‘Cassandra’, which signalled a crisis occurring in these six countries.

In the backtesting, Cassandra correctly signalled two-thirds of the past 53 crises in its sample of 40 economies since the early 1990s.

The indicator shows India is out of the woods and there is no imminent danger of a financial crisis. All parameters for the country are below the danger line, the data suggests.