Financial fragmentation: the $6 trillion cost of breaking the "plumbing" of global finance

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Matt Strahan, Lead, Private Market Initiatives, Financial and Monetary Systems, World Economic Forum: For the past half century or so, the global financial system really served as that engine for global economic growth, the world economy's major artery.

Robin Pomeroy, Host, Radio Davos: Welcome to Radio Davos, the podcast from the World Economic Forum that looks at the biggest challenges and how we might solve them. This week we’re looking at the global financial system - and asking what happens when the “world economy's major artery” gets blocked or fragmented.

Anne Walsh, Managing Partner and Chief Investment Office, Guggenheim Partners: Whenever you break down silos and barriers, capital can flow more efficiently and freely. What we've seen more lately, however, is the emergence of more barriers and less freedom of capital.

Daniel Tannebaum, Global Anti-Financial Crime Practice Leader, Oliver Wyman: The plumbing of finance became a lever of foreign policy and the precedent was set that access to the system could be weaponized.

Robin Pomeroy: We hear from three experts on the causes and impacts of financial fragmentation everywhere in the world

Daniel Tannebaum: We're seeing in the first year of the Trump administration 2.0 a rewriting of this global order that will last.

Robin Pomeroy: Follow Radio Davos wherever you get podcasts, or visit wef.ch/podcasts where you will also find our sister programmes, Meet the Leader, one-one-one interviews with some of the most interesting people in the world, and Agenda Dialogues, the full audio from the best discussions at World Economic Forum events, including the Annual Meeting in Davos.

I’m Robin Pomeroy at the World Economic Forum, and with this look at financial fragmentation …

Matt Strahan: While the idea that the world is going to completely splinter into two with no trade is perhaps unlikely and still hopefully remains unlikely, it is an increasing probability, which requires you to really begin to study and understand.

Robin Pomeroy: This is Radio Davos.

Geopolitical tensions, new technologies, tariffs, trade barriers - there are lots of ways the global financial system can be disrupted. Sometimes it is done deliberately - often with unintended consequences - consequences that can affect all of us.

On this episode, I am handing over to my colleague Spencer Feingold, who explains the issue and looks for solutions.

Spencer recorded three very interesting interviews on the subject at the World Economic Forum’s Annual Meeting in Davos. First, he gets an overview of the issues with Matt Strahan, a Forum expert on Financial and Monetary Systems, who is one of the lead authors of a report from the Forum and Oliver Wyman on financial fragmentation that details the economic costs.

Here’s Spencer and Matt.

Spencer Feingold, Lead Editor, World Economic Forum: Matt, thanks for joining Radio Davos. Just to begin, what exactly do you mean when you refer to global financial systems? Our audience might not be familiar with that.

Matt Strahan: First off, Spencer, thank you so much for having me today.

And that's a great question. The global financial system is really just this interconnected network of financial institutions, of markets, instruments, and it facilitates the flow of capital both within and then across borders.

So when I'm talking financial institutions I'm taking everything from central banks, ministries of finance, which respectively set interest rates, manage prices, as well as manage the amount of money that's in circulation.

But it also includes commercial banks, it includes retail banks that you engage with where you put deposits, depending upon where you are in the world, as well as investment firms, regulatory bodies, et cetera.

And all of these institutions work together to allocate resources, manage risks, and provide liquidity. Really the idea being they manage risk and they provide the financing which is required to power the engine that is the global economy.

It's really complex. It includes a wide array of financial products, services, agreements, some of which are formal in the form of contracts or certain markets. And many of which also informal, which we'll talk a little bit more about in a moment.

And it collectively facilitates the movement of capital both for purposes of investment and trade.

Like I mentioned, it really functions to promote economic growth, stability, and integration. And it also relies, of course, on a series of domestic financial markets, local banks, stock exchanges, where you might have your 401k invested or a personal savings account invested, bond markets, et cetera, really with the idea of facilitating investment and the proper management of risk, et cetera.

And for the past half century or so, the global financial system has evolved but really served, like I mentioned, as that engine for global economic growth, the world economy's major artery.

We've lifted a tremendous amount of people. We have the rate of people living in extreme poverty around the world. And like any social system, that has happened in large part because of a shared common set of rules, principles, and norms, which functionally underpin the system and make actors feel comfortable putting money to work across borders and facilitating international markets.

Spencer Feingold: Do you mind just going a little bit deeper? You said norms and rules, of course, make us all feel comfortable. But how does that translate into economic growth?

Matt Strahan: Of course. So when the Forum first launched this initiative, we really started to think about those elements which underpin the global financial system. Like I said, what makes someone feel comfortable putting their money to work in another country and allowing for that creation of a global system? Some of which is formal, but most of which are informal, which is really what we've tried to focus on.

So what are some of those elements that we talk about? The first is a clearly defined and upheld rule of law that ensures impartial enforcement of the law. It ensures predictability. That way, regardless of where you are, you know you're being treated fairly, respectfully, equally, even if you're operating outside of your own home jurisdiction.

And many of these things have also allowed, for example, the growth of the US dollar and the support for the US dollar. So really critical both in a US context and a global context as well.

But we're also talking about things like respect for financial and physical property ownership rights. If you're an investor sitting in Singapore, you want to know that your property that you've invested in in the United States, China, Europe, will be respected equally, that your ownership of that will be respected.

But it also includes things like the unilateral expropriation of sovereign assets. Sovereign assets really are what central banks and governments use to stabilise their own currencies and provide financial stability using other countries' currencies. So making sure that when you have those deposits abroad for that explicit purpose of financial stability, you're not unilaterally expropriating those assets.

Perhaps even more critical and recent in the United States, for example, though, is also the independence of fiscal and monetary policy. We're seeing an increasing politicisation of decisions made by central bankers. And really, governments critically rely, governments, I should say, and corporates and financial institutions, really rely on professional, academic, fiscal, and monetary policymaking where folks feel comfortable then in terms of interest rates, in terms a financial stability, et cetera.

But there's also some things that we didn't necessarily think of when you first launched this project, which we're considering in this new analysis, including the independence of government data. How can you rely on jobs data? How can rely on economic growth metrics? Because really that predictability is what's so essential for financial institutions.

Spencer Feingold: And so in your analysis, you look at various scenarios of financial system fragmentation going from not so bad to the worst. What happens in the worst case scenario? Are we going to lose trust in those systems?

Matt Strahan: Great question. So we came about this work, essentially in 2024, following the Russian invasion of Ukraine and the sanctions regimes which came out.

And not to pass judgement on those decisions, on why they were taken, there were certain decisions made, whether it's cutting major Russian financial institutions out of interbank messaging systems, or, like I mentioned, the expropriation of sovereign assets, cutting Russian corporates out of certain exchanges for bonds, for equities, et cetera.

Really there were some underlying risks there exposed, potential threats to the integrity of the system. And we're really thinking about kind of downstream implications.

What we've seen though, is that there are major economic consequences associated with that loss of trust.

So in the analysis we have done, we assume a range of scenarios from very low fragmentation to high fragmentation. And that high fragmation scenario assumes a full economic decoupling between East and West. Essentially, carve the world up in two between the US and its allies, China and its allies, and folks are forced to choose. That's really that worst case scenario. The consequences could be more than $6 trillion, which is more than the impact of the global financial crisis, the COVID-19 pandemic, et cetera.

But there are also many smaller instances that lead up to that as well. So for example, in the very low fragmentation scenario that we model. In this report we're actually modelling the current economic impact of trade and tariff policy that exists today in the world and that's more than $200 billion alone based on what we have right now.

So there's many different gradients of severity of fragmentation where that worst case is an economic decoupling but today's is is also just as costly

Spencer Feingold: And another thing that jumped out at me when looking at the analysis, you note that global financial systems are more interconnected today than ever. Yet at the same time, they're more vulnerable. So how do you square that?

Matt Strahan: So the global financial system is among, to your point, the most interconnected interdependent ecosystems in the world.

A few stats just to validate that. Cross-border bank credit stands at nearly $40 trillion, which is roughly the size of the GDP of the United States, Germany, Japan, and India combined. So a massive number.

Governments and corporates in 2025 issued more than $10 trillion in bonds. And the total value of cross-bordered payments in 2023, i.e. just payments moving across borders, was estimated at more than $190 trillion.

So again, that data really shows just how deeply interconnected these systems are.

But, as you mentioned, there's also a risk of fragmentation, of splintering of that global system. That's being driven by a number of things.

You have everything from technology, so the emergence of artificial intelligence, central bank digital currencies, stable coins, etc. While they have the opportunity to bring people together, make things more instant and you also create a risk of a lack of interoperability between technologies or technological islands.

You also have financial stability implications. So during the global financial crisis, for example, what started as a crisis in the US mortgage market, in the US housing market, ended up spiralling and causing a global financial crisis.

So we've seen some things kind of revert away from that more interconnectedness, whether it's technology, whether it is regulation. But in particular, what we've been focused on for the past few years has been the geoeconomic or geopolitical perspective.

Spencer Feingold: Well, thanks a lot, Matt.

In January, at the Forum's Annual Meeting in Davos, Matt and I spoke with another lead author of the report, Daniel Tannebaum, a partner and the Global Anti-Financial Crime Practise Leader at Oliver Wyman.

Dan, thank you so much for joining Radio Davos and joining Matt and me here in Davos, Switzerland. I just want to start out by asking you to perhaps set the scene a bit. Do you mind providing a historical overview of the global financial system and perhaps getting into the details of what happened after the end of the Bretton Woods system in the 1970s?

Daniel Tannebaum: If you step back, the system we're talking about today was essentially created after the collapse of the Bretton Woods system of fixed exchange rates in '71.

What emerged over the following decades was a highly interconnected network of institutions, regulators, and technologies that enabled cross-border payments and capital flows at scale we've never seen before. This structure, this architecture has really underpinned global growth for more than half a century.

Matt Strahan: We're talking about integration but we're also talking about fragmentation. When when did the idea of fragmentation and a break apart of that system begin? When did it first emerge?

Daniel Tannebaum: So fragmentation starts to emerge as a systemic concern in three waves. First, in response to the attacks in New York and Washington on September 11th, countries quite rightly focused on cutting off terrorist financing.

In the process, they developed sophisticated tools to use the financial system as an instrument of economic statecraft, where I happened to serve at the US Treasury Department in some of those early days.

Now, this mattered because the plumbing of finance became a lever of foreign policy and the precedent was set that access to the system could be weaponized, whether for a justified purpose on which there was a broad alignment, as it was with cutting off terrorist financing after September 11th, or other purposes.

The second wave came after the global financial crisis in 2008, which exposed major vulnerabilities using global banks and markets and eroded trust in both institutions and regulators alike.

It triggered regulation and a more cautious attitude to cross-border exposures and made policymakers more comfortable using financial tools aggressively in the name of stability.

And then finally, most recently, the second invasion of Ukraine in 2022 led the G7 to impose the most significant sanctions amongst a major economy that we've ever seen. This showed that states were willing to use the system to exclude an entire major economy, not just targeted actors, and it accelerated efforts by others to build alternatives.

Matt Strahan: Are there any good or responsible uses of economic statecraft? You mentioned a little bit terrorist financing and combating the financing of terrorist financing, but what else might be an example of that?

Daniel Tannebaum: So, sanctions in their most basic form as an instrument of economic statecraft were designed to force a change in behaviour.

Arguably, the sanctions that were imposed on South Africa related to apartheid, and South Africa had a hand in ultimately the lifting of the apartheid regime.

Sanctions had a hand in bringing down Gaddafi and the end of his regime running Libya.

Now, they're most responsible when they're targeted, time-bound, and grounded in a bilateral process. They're transparent around objectives, scope, and exit criteria, and they're designed with input from the private sector to minimise unintended consequences.

The concept of positive economic statecraft doesn't really get spoken of enough because that ability to entice people to do the right thing with the carrot, more often than not, the stick is being used.

Matt Strahan: When does it become harmful, then, to the global economy and growth?

Daniel Tannebaum: So, it becomes harmful when measures escalate quickly, including among allies, with limited coordination, as we saw with Liberation Day in April, where tariffs were imposed on close to US trading partners in 2025, including Canada, and a range of tariffs on African countries.

It becomes harmful when tools intended for security become a routine instrument for broader economic competition.

And they're extremely harmful when policymakers don't account for unintended consequences. A great example is when Russia sanctions were imposed against a host of oligarchs in 2018, there was one oligarchy in question who controlled 10% of the world's aluminium. So in essence, the US government in that designation and that sanctioning briefly destabilised the world aluminium sector for a few weeks as it took 10% of the worlds aluminium essentially off the market.

Matt Strahan: We talk about access to the dollar. Really then what we're talking about is the politicisation of payments, the proliferation of new systems in recent years. First off, why is interoperability between payment systems so critical to the functioning of the global financial system?

Daniel Tannebaum: I think the interoperability is critical to ensure access to different rails in different markets. I mean, not everyone is operating on the same payment gateways. And so ensuring that there's the ability to enable cross-border trade in a swift and hopefully cost-efficient manner is critical to ensuring collective global access to global economies, not just in the large-scale ones, but in the developing world as well. Really levelling the playing field.

Matt Strahan: And how is the launch of alternative payment systems than established payment systems, how has that impacted fragmentation trends?

Daniel Tannebaum: So you certainly get a more multipolar currency and payments environment. That's not inherently bad.

I think what has been a big focus after Russia's second invasion of Ukraine was China's CIPS as an alternative payment network to SWIFT, for instance.

Now, if SWIFT, the Pan-African payment and settlement system, stable coin networks and card schemes can talk to SWIFT and to each other, you preserve much of the efficiency of a single global scheme.

CIPS, for instance, is currently interoperable with SWIFT and even relies on SWIFT messaging. The challenge is if these become closed networks, that creates obviously a threat for the ability to move capital around the world as freely and really does draw lines in creating more defined blocks versus a broader global economy.

Matt Strahan: We have worked with Oliver Wyman on work identifying kind of norms, rules, principles that underpin the global financial system, really what allows firms to operate across border, across jurisdictionally with a degree of security and safety. Which of those norms really are under threat in this moment? And what does it mean? Why?

Daniel Tannebaum: I think that access to global markets, regardless of your connection in the world, is the most threatened at this point, where you're really seeing lines being drawn to attempt to force an us or them type mentality as an instrument of economic statecraft.

I think, that disconnection, the federation of a global economy, is of huge concern with what's happening today as you see new trading blocks emerge, and potentially coercion to keep people off certain payment rails.

So I think that is probably the greatest concern as well as unintended consequence of a lot of these measures.

Some of the type of moves, if you look at Liberation Day, for example, obviously had massive impacts. There were barely a corner of the world that we saw unimpacted, including an uninhabited island chain with penguins.

But I think as we look to these type of measures, and every nation has the ability to safeguard its own economy, really understanding the second and third order impacts, which can be other nations responding in kind. So those that are driving a lot of this fragmentation may ultimately be harmed more than they may immediately realise.

Matt Strahan: In a paper that we have released with Oliver Wyman, we share an analysis conducted by NERA Economic Consulting, which assesses the potential economic impact of financial system fragmentation. We first estimated this back in January, 2025. What was the purpose of revisiting this analysis and what assumptions had to be rethought?

Daniel Tannebaum: When we released our first flagship report over a year ago and just two days into the Trump administration, we modelled four scenarios, from low to very high fragmentation and estimated that in a worst case scenario, fragmentation could cost up to $5.7 trillion, about 5% of global GDP and roughly twice the output loss of COVID.

What changed in 2025 is that, while our model was largely validated, some of the assumptions we made were challenged, specifically tariffs between the US and its allies, something we had not considered as a possibility, did in fact come to pass.

We thought sensitive technology trade between the US and China would be first to go in any escalatory scenario. That actually has persisted.

And we saw a need to model some degree of restrictions placed on services trade in more extreme fragmentation scenarios, which had largely been left out of the equation thus far.

Matt Strahan: After these are incorporated, these new assumptions. What are the key findings?

Daniel Tannebaum: So I want to highlight three.

First, we want to emphasise that policies in place today are already having an effect. Second, it could get much worse. Further fragmentation lowers output and raises inflation across blocs. And in each of the escalatory scenarios we modelled. And lastly, fragmentation manifests in varied and surprising ways at a regional level.

We interviewed the leaders of large financial institutions across major African economies, and they told us that fragmentation did indeed exacerbate existing challenges such as high cost of capital and volatility in FDI flows. But at the same time, these leaders told us, that they saw the moment almost as a forcing mechanism to pursue new sources of trade and investment and push for regional integration initiatives like the African Continental Free Trade Area.

Spencer Feingold: Well, listening to you guys talk, one saying came to mind that it's easy to break things, but hard to rebuild them. So should a very high fragmentation environment come to the global economy, how easy would it be to recover from that?

Daniel Tannebaum: A lot of these trade policies are driven by the political trade winds. Governments change, leaders change, and policies change with that. I think that is an area where certainly in the US there's hope that the market acts as a guardrail to really drive any recalibration of policy, certainly if other nations begin responding to the US the way it's attempted to impose penalties on others, that would have a significant impact as well.

So I don't think these are permanent instances, but certainly what we're seeing in the first year of the Trump administration 2.0 is a rewriting of this global order that will last, certainly for some time to come that may extend beyond his time in office.

Spencer Feingold: Well, Dan, thank you for joining Radio Davos. We appreciate you taking the time.

In Davos, I also spoke with Anne Walsh, the managing partner and chief investment officer of Guggenheim Partners, a major global investment and advisory financial services firm based in New York.

I started by asking Anne how integration has spurred growth in the global economy, as well as in the financial sector.

Anne Walsh: Generally speaking, whenever you break down silos and barriers and capital can flow more efficiently and freely, that's usually, and my experience has been, it's been a strong positive. And if we look over the history of economic cycles and the history of markets and interconnected economies, that has proven to be true.

What we've seen more lately, however, is the emergence of more barriers and less freedom of capital.

Freedom of capital also allows investors to reach across multiple geographies, multiple types of markets, and have also the freedom of and flow of information, which makes researching investment ideas and the flexibility of investment ideas stronger. And as a result, the outcome has historically been better returns for investors.

So, breaking down of barriers, having efficient markets, that's a strong positive. And again, history has demonstrated that to be the case.

Spencer Feingold: And how about, well, correct me if I'm wrong, but Guggenheim Investments says it has $350 billion in assets. So how has integration of financial markets helped your firm to grow?

Anne Walsh: Well, the integration of markets has allowed us to make investment choices, again, across borders, across different sectors and segments of different markets, and to be able to be really flexible and nimble with regard to where we'd want to deploy capital.

Again, the effort that we expend is designed to create better returns for our clients. And over the course of time, that's proven to be the case.

And I would tell you that that flexibility, it really is a benefit for investors. And again, wherever they may be.

Additionally, that allows us, as predominantly a US-based investment manager, to attract investment from outside the US borders. So it's really helped us to increase our clients and the benefits to clients who come to us from all parts of the globe.

And I think that's really important so they can access the opportunities in the US through us. But then also we have the ability on their behalf to access in the US, but also cross borders as well.

So this integration of capital markets has been a very strong positive for our investors over the course of time.

Spencer Feingold: And you mention financial system fragmentation. And of course that is a pretty big topic of conversation here in Davos. Do you mind just speaking a little bit more on kind of the impact of financial fragmentation and do you see 2025 or I guess the trend towards fragmentation as a big shift change or kind of a gradual trend?

Anne Walsh: It's really interesting. So any time you reduce the elements or the opportunity sets for investment, or you create barriers to free capital flows, you, by definition, create friction in the investment world and in the investment opportunity.

And so whether that's barriers to information, barriers to capital free flows, making it more challenging for investors to make decisions, all of those enter into the problems or the characterisation of fragmentation.

That is where we have to work harder as investors, and frankly, the opportunity set becomes diminished. In that way, I think that investors will find themselves more challenged to create and find great returns over the course of time.

We are seeing an increase in this. I do believe, however, so far, it has been slow to develop.

We are seeing tariffs are a form of fragmentation. They reduce, in that case, the flow of commerce. And so as a result, it's not just capital, but it can be transactions and it can be trade.

And so right now in the US, we've seen tariffs go from average aggregate level of 2% to right now running about 11%. Now that is a very meaningful increase in the cost of goods and services cross-border.

However, the good news is, for now, is that it's not as high as we expected those tariff levels to become when Liberation Day occurred earlier, in April of 2025.

However, said that, could they go higher? Well, that's the risk. And so that creates more barriers to trade and commerce.

Likewise, along with that goes challenges potentially to investment. And so, as a result, every time we create more barriers, we reduce the opportunity set a little bit, or at least create friction to that opportunity set.

Spencer Feingold: Besides tariffs, are there any other barriers to financial systems that are creating fragmentation that I don't want to say keep you up at night, but that you watch closely, like restrictions on various investments around high tech or this kind of trend towards friend shoring?

Anne Walsh: There's several barriers that you can have. You can have information barriers, you can regulatory barriers. And right now, at least a positive in the US is that we are hoping for continued deregulation, which should be a positive, which is a tailwind against the headwind of other barriers that are coming up.

Information barriers can exist where flows of information slow down. And that can be whether it's censorship where you limit freedom of access to information or the freedom to communicate that information.

So there's lots of different ways to create barriers. Business leaders should work hard to ensure that they are lobbying against and or encouraging the breaking down of those barriers, not the increasing of those.

Spencer Feingold: I'd like to ask you about US Treasury bonds and the bond market. Why have Treasury bonds been such an integral part of the global financial system in recent decades?

Anne Walsh: Well, the US market for fixed income is the largest and most liquid in the world. And Treasury bonds and notes, the whole Treasury market, has been really the level set rate of interest from which other markets tend to price off of, the so-called risk-free rate.

And so as a result, where the Treasury markets go really sets the level of return objective that investors around the globe really want to be able to achieve.

And so as a result, it's an extremely important market. It's deep. It's significant. The US fixed income markets, beyond the rates, but the entirety, is over $50 trillion. That's a very deep, very liquid market. And so, as a result, it's extremely important for the world to observe. And, you know, obviously, the rate of the 10-year Treasury is extremely important for setting any number of policy measures off of it. Or other rates, whether it's US mortgage rates, whether it is other governmental rates, sovereign rates across the globe.

So all of that tends to trade in alliance with or in tandem with the US government market.

Spencer Feingold: In periods of volatility, which one could say we're in one now, how does that impact the bond market and how should we be looking at the bond market in these periods?

Anne Walsh: Investing by its definition is making decisions in uncertain times with incomplete information. So that's where we find ourselves in all markets.

Having said that, these days, it seems that the level of uncertainty and volatility has increased. We've certainly seen fixed income volatility increase as represented by the MOVE Index, and we've certainly see equity markets react as well.

One of the concern levels for investors is the absolute level of debt that's being issued in the US And, dare I say, globally by sovereigns.

The sheer level of that has to be issued to finance all sorts of projects, but right now let's limit our conversation to government securities, to finance the work of governments and in particular with the US, has caused investors to have a level of uncertainty that's even higher than in past cycles.

And so this has caused rates to go up in order to finance that totality of that debt, and that is very expensive for governments to finance. It's expensive for the US government, and this is going to continue as investors want to get a level of risk premium that pays them for this uncertainty.

That's going to drive, I think, the market, certainly in 2026.

Spencer Feingold: Right, and speaking of the US, most commentators would say that the US dollar will remain the world reserve currency, at least for the near future. But there is talk, including here at Davos, of kind of a de-dollarization and trends towards that. And we are seeing countries of various forms use other currencies for their reserves as well as for cross-border transactions. I guess, how do you see that? And where do you the evolution of the US dollar in the near term and perhaps medium term?

Anne Walsh: My view is that the US dollar will continue to be the reserve currency. 70% of transactions globally are being conducted in dollars. Certainly, commodity sales and transactions are dollars. Cross-border transactions are in dollars.

However, what we've also seen is, because of various levels of uncertainty based on US governmental policies, and particularly tariffs, we've seen a shift of non-US investors into other dollar-based assets. So they're not moving away from the dollar necessarily, but they are moving their assets into other dollar-based assets, whether that's gold or silver or hard assets. And as a result, they are concerned about the level of government debt by the US, and they're also concerned about governmental policies and looking for returns outside the US that may be able to provide them more safety and security away from financing the US government at this particular time.

So while I see the trends in the transactions, investments by non-US investors moving away from some particularly US government debt, I also see the continuation of the dollar being predominant reserve currency for the world.

Spencer Feingold: Anne, thank you so much for joining us, really appreciate it.

Anne Walsh: Thank you.

Spencer Feingold: Our latest report also found that the consequences of financial system fragmentation will be felt most acutely in emerging markets, particularly in Africa.

So to better understand this impact, I sat down in Davos with Daniel Mminele, the chairman of Nedbank, one of the largest financial services groups in Africa

I'd like to just start off with sort of a high level question. We are in Davo and there is some talk of fragmented blocks emerging in the global economy that is fragmented block with different currencies, payment systems, certainly regulatory regimes. Curious your assessment of that. Do you believe we are entering an era of different economic blocs?

Daniel Mminele: I certainly do not think that we are in an era where those blocs are fully developed and in a position to compete with each other. But we are certainly closer than we were a few years ago.

What we have been seeing is increasing fragmentation. We have seen that being driven by policy choices rather than, say, market events or anything like that.

So what tends to happen is that while countries, for reasons that may actually be justified by wanting to diversify, to hedge against vulnerability, that they sometimes would take policy decisions that might make sense from a single country perspective, but if they then get adopted more broadly, they then may result in risks being transmitted such that they become globally systemic as such.

But I think the direction of travel has been there. It is accelerating given geopolitical tensions that are increasing. And we're certainly seeing that the discussions around alternatives, around creating different payment systems, different trade channels, thinking about bolstering regional value chains, on-shoring, friend-shroring, near-shering.

All those issues are gathering momentum, but I think we are a little bit distant from a situation where these blocs are in a position where they can fully sort of compete each other. But the risks of that gathering speed are increasing.

Spencer Feingold: And research shows that emerging markets and African economies in particular are more at risk of the fallout of fragmentation. There's some outdo consequences that could emerge. Why is that so? Why are emerging economies more at risk?

Daniel Mminele: Look, I think the reason for that is that when you look at global finance, emerging markets and developing economies are essentially price takers. In a sense that when these risks materialise, they will show up very quickly in emerging market and potentially disproportionately so. So you will see higher risk premium, you will the cost of debt service going up, You will see access to capital markets are being restricted.

And those kind of things then are sort of catalytic and may inform a little bit of a downward spiral and that increases uncertainty, that undermines confidence, that affect people's willingness to invest. And obviously consequently, growth and development dynamics are affected, job creation is affected.

But the reason that they would register much more strongly on the African continent also has to do with the fact that they will be compounding pre-existing structural vulnerabilities that are already there that have to do with issues such as high level of dependency on commodity exports on the continent, infrastructure financing gaps, trade finance challenges, issues where our payment systems are not fully integrated yet, so sovereign debt levels.

So the issue is that there are pre-existing issues that would be exacerbated or compounded by these risks materialising.

Spencer Feingold: And just speaking of trade, in 2025, we of course saw a lot of trade shocks driven largely by tariffs coming out of Washington. How do those kind of global trade shocks impact African economies? What might be the effect on supply change or say foreign direct investment?

Daniel Mminele: Well, as I've indicated, we are dependent on commodity exports, which obviously require trade finance, they require access to capital markets. And obviously once those get disrupted, they increase the cost of doing business, they affect sentiment, they undermine confidence, and generally would hold back African economies.

And some of the issues that potentially might help galvanise some action on the continent, maybe on the other side of the coin, that we get regional value chains development being accelerated, that development of domestic capital markets gets put forward.

But those are pros and cons, one has to assess that carefully.

But on a net basis, there would be an increase in overall cost and probably damaging impacts for Africa.

Spencer Feingold: And I'm quite curious about your thoughts on the African Continental Free Trade Area. How might that impact the continent?

Daniel Mminele: The African Continental Free Trade Area is a massive opportunity, is a potential game changer for the African continent and a lever for development and growth.

What we have is not a lack of ambition or even political will, although in some instances one could see that strengthened. The issue is implementation gaps is at different speeds of implementation.

Most African countries have adopted and ratified the agreements, but implementation is uneven. So issues around, again, infrastructure, lack of sort of regional integration, harmonisation of licencing, permitting structures, regulatory standards and so forth.

So if progress can be made on that, that would be a huge catalyst for intra-African trade and to help growth and development of the continent.

Spencer Feingold: And what about digital currencies, thinking stable coins and other cryptocurrencies? Do you see digital assets and cryptocurrencies as also a way of African economies to diversify?

Daniel Mminele: Well, I think digitization innovation is definitely the way for Africa to go in its broadest form.

And what we have seen very encouragingly is how the African continent has been engaging in initiatives that will allow it to leapfrog. Africa is already a leader in mobile banking technology. You've seen fintech being adopted. And so I think digital currencies will also be advantageous in the sense that African economies will not be held back by a lot of some of the legacy issues that are there. They can afford to be more agile in embracing a technology.

So I think also from a point of view of the interconnectedness with where we've come from, from trade in terms of the shifts that are needed, whether it's decarbonization and digitization, a lot of that is dependent again on the resources that sit on the continent, whether it's what people refer to as critical minerals and zinc, copper, cobalt, the platinum group metals. So basically the world will not be able to decarbonize without Africa.

And so there is a great opportunity for Africa to play a leading a role in that regard, then what we have seen, which is encouraging to me, is as part of the G20 presidency of South Africa last year, we have see a major shift where Africa increasingly is shaping the narrative around its growth, around its development. It's moving at a very encouraging rate from being a recipient of global standards to being a co-creator, to being a participant in international decision-making with representativity, with voice being increased.

So I think all of that would stand Africa in good stead as we look into processes around innovation and digitalization.

Spencer Feingold: With regards to digitization, do you also worry about a patchwork framework of regulations? Like we're seeing various regulations in the US, in Europe, in China. How does that complicate, you know, the choices that private sector, as well as policymakers have to make in Africa?

Daniel Mminele: Look, it's no different in a way or similar to what we're talking about with trade. So what is really, really important is as and when people diversify and innovate and create different systems and different alliances to hedge, if you wish, against vulnerability, we've got to make sure that in the process we don't sacrifice interoperability, we don't sacrifice the trust that underpins those arrangements.

So it's very important that in the process, as one develops and innovates, that one keeps that in mind as well, that these systems must keep talking to each other. And the dialogue around how we develop must be based on shared and common purpose on the integrity of the systems that we need, their robustness and risk reduction measures for those systems.

But of course, the more systems, the more diversity you have, the more complex the system becomes, potentially more inefficient, more costly.

So those are the kind of things that one needs to look at in terms of a very sober analysis of some of the cost and benefits.

Spencer Feingold: And another big topic of discussion here in Davos is government debt. So how do the high levels of government debt in Africa impact the risk of fragmentation? And I suppose how might the continued fragmentation of financial systems impact the cost of capital?

Daniel Mminele: As I indicated earlier, the increased level of fragmentation would basically compound some of the pre-existing vulnerabilities that we have and sovereign debt levels being one of them. So that will increase volatility, that will spill over into exchange rates, that can complicate monetary policy, and so forth. So you can see how the level of sovereign debt is critical to that.

And, as you know, this follows through from G20. One of the priorities of the African presidency was around tackling this issue of sovereign debt of Africa and other emerging and developing economies to make sure that what, certainly with regard to Africa, seems to be almost an element of a perception penalty that is being imposed. And what I mean with that is that you find that a disproportionate level of compensation is being required relative to the actual underlying risks that one is taking.

I'll give you an example of that which we saw in the work that we did around a task force that I was involved with dealing with energy mix and just transition. When you look at just climate finance flows to the African continent, you could see that we are getting a fraction of what it needed, flows are increasing globally, but not necessarily going where they'll be most impactful or where they're most needed. And part of it has got to do with high risk premiums where, for instance, you can compare projects in countries that have a similar GDP or similar structures that are rated in sort of a similar way when it comes to rating agencies. But then when you look at the pricing, African countries are then facing premiums that can be up to five, six percentage points higher than comparable other countries in other regions.

Spencer Feingold: Great. Well, Mr. Mminele, thank you for taking the time. We really appreciate it.

I'm joined again by my colleague, Matt Strahan. Matt, we heard from our guests about the very real consequences of financial system fragmentation. So we'd like to know how close are we to a situation where very high fragmentation emerges? Is that something we should be expecting in the near future?

Matt Strahan: That's a great question, Spencer.

In our report, we model a series of scenarios with escalating levels of fragmentation to your point, starting with a low base case scenario, working all the way up to a very high fragmentation scenario.

And of course, that very high fragmentation has huge costs for the global economy, more than $6 trillion we project and it assumes essentially an economic decoupling between the East and the West and everyone being forced to pick a side. So that really is a worst case scenario for us in terms of what that looks like.

The likelihood, of course it is still a distant, distant possibility. But what we've seen over the past year is a trend in that direction.

So, for example, in 2025, we saw increasing tariff and trade tensions between the world's two largest economies, the United States and China, and at one point, there was a more than 100% tariff rate between each country on the other. That amounts essentially to an economic decoupling between the two world's largest economies, which really is quite devastating.

So while the idea that the world is going to completely splinter into two with no trade is perhaps unlikely and still hopefully remains unlikely, it is an increasing probability, which requires you to really begin to study and understand.

We had interesting conversations in Davos with a number of members of the steering committee with whom we work, policymakers, and their philosophy really is to model the worst but plan for the probable.

Spencer Feingold: And you said you've been in contact with policymakers. So I'm just curious, say I'm a policymaker, what should I keep front of mind moving forward in order to mitigate some of the impacts of fragmentation?

Matt Strahan: In our original report released in 2025 and in this new report that we're releasing, we have done work with a number of CEOs, chairs, global leaders, a steering committee and working group, where we've really thought about frameworks which we think can help protect the financial system from being politicised and really then prevent it from being fragmented along the lines that we're talking about.

So we identify the principles to protect the financial system from fragmentation. We define those really as those core elements that we talked about earlier that allow for cross-border transactions to take place. And then also rules for responsible economic statecraft, which really are designed to help policymakers craft economic state craft policies which meet their national defence, security resilience objectives without fundamentally undermining global growth.

So our ask of policymakers, our recommendation to policymakers, would be really to think about those types of frameworks and what can be instituted, which will allow countries to pursue their domestic resiliency objectives, to monitor their financial systems in a way that they find appropriate, but without doing so in a away that fundamentally undermines the integrity of the system and makes it impossible to deliver economic growth.

We put forward these frameworks as kind of a call to action from the financial services community, from the industry, from the various folks who are invested in this work, and we hope that policymakers will consider them.

Spencer Feingold: Thanks a lot, Matt.

And thanks to all our listeners around the world. For more analysis and insights on financial system fragmentation, check out the full World Economic Forum report linked in the show notes.

And to make sure you don't miss out on any Radio Davos episodes, please follow Radio Davos and our sister podcast, Meet the Leader, wherever you get your podcasts or at wef.ch/podcasts.

I'm Spencer Feingold of the World Economic Forum. Thanks for listening and goodbye for now.