IMF re­port warns low global rates are ex­ac­er­bat­ing fi­nan­cial risks

Vancouver Sun - - FINANCIAL POST - JEFF KEARNS

WASH­ING­TON The In­ter­na­tional Mone­tary Fund warned that global eco­nomic risks have risen as cen­tral banks re­duce bor­row­ing costs and that stronger over­sight is needed ease threats to an al­ready shaky ex­pan­sion.

“While eas­ier fi­nan­cial con­di­tions have sup­ported eco­nomic growth and helped con­tain down­side risks to the outlook in the near term, they have also en­cour­aged more fi­nan­cial risk-tak­ing and a fur­ther buildup of fi­nan­cial vul­ner­a­bil­i­ties, putting medium-term growth at risk,” the IMF said Wed­nes­day in its lat­est Global Fi­nan­cial Sta­bil­ity Re­port.

The pol­icy eas­ing that has helped sup­port global growth has also fu­elled a fur­ther in­crease of fi­nan­cial risks, and threats to global growth and fi­nan­cial sta­bil­ity re­main “firmly skewed to the down­side,” the fund said. It added that pol­icy-mak­ers “ur­gently need to take ac­tion to tackle fi­nan­cial vul­ner­a­bil­i­ties that could ex­ac­er­bate the next eco­nomic down­turn.”

The lat­est warn­ings come a day af­ter the fund said global growth is on pace for the weak­est ex­pan­sion since 2009, when the world econ­omy shrank, as trade wars cloud the outlook. Those dis­putes have whip­sawed global mar­kets and weighed on business sen­ti­ment, though cen­tral bank eas­ing has helped al­le­vi­ate con­cerns about a deeper eco­nomic slow­down, the re­port said.

The fund said lower yields are spurring in­vestors such as in­sur­ance com­pa­nies and pen­sion funds “to in­vest in riskier and less liq­uid se­cu­ri­ties” and that pric­ing in fi­nan­cial mar­kets sig­nals in­ter­est rates will re­main lower for longer than an­tic­i­pated at the start of this year. About US$15 tril­lion of debt world­wide has neg­a­tive yields, it said.

“Vul­ner­a­bil­i­ties have con­tin­ued to in­ten­sify, putting growth at risk,” To­bias Adrian, direc­tor of the Mone­tary and Cap­i­tal Mar­kets De­part­ment, told re­porters at a brief­ing on Wed­nes­day, adding that pol­icy-mak­ers need to pre­vent a roll­back of reg­u­la­tory re­forms.

While there’s been sig­nif­i­cant progress on bank­ing reg­u­la­tions, cap­i­tal stan­dards and liq­uid­ity lev­els since the cri­sis, trade pol­icy is a new threat for sta­bil­ity, he said.

Trade ten­sions have fu­elled pes­simism in mar­kets, cre­at­ing un­cer­tainty and re­peat­edly caus­ing “down­side risks,” Adrian said.

The re­port said risks in China re­main el­e­vated due to high debt lev­els for in­vest­ment ve­hi­cles.

Vul­ner­a­bil­ity among non-bank in­sti­tu­tions is el­e­vated in 80 per cent of na­tions with large fi­nan­cial sec­tors, a share sim­i­lar to the depths of the global fi­nan­cial cri­sis, the fund said.

In an eco­nomic slow­down sce­nario half as se­vere, cor­po­rate debt owed by firms un­able to cover their in­ter­est pay­ments with earn­ings could rise to US$19 tril­lion, or nearly 40 per cent of com­pany debt in ma­jor economies.

“The search for yield in a pro­longed low-in­ter­est-rate en­vi­ron­ment has led to stretched val­u­a­tions in risky as­set mar­kets around the globe, rais­ing the pos­si­bil­ity of sharp, sud­den ad­just­ments in fi­nan­cial con­di­tions,” the fund said. “Such sharp tight­en­ing could have sig­nif­i­cant macroe­co­nomic im­pli­ca­tions, es­pe­cially in coun­tries with el­e­vated fi­nan­cial vul­ner­a­bil­i­ties.”

IMF chief econ­o­mist Gita Gopinath pointed to ris­ing fi­nan­cial sta­bil­ity risks on Tues­day af­ter re­leas­ing the World Eco­nomic Outlook.

“While mone­tary eas­ing has sup­ported growth, it is es­sen­tial that ef­fec­tive macro­pru­den­tial reg­u­la­tion be de­ployed today to pre­vent mis­pric­ing of risk and ex­ces­sive buildup of fi­nan­cial vul­ner­a­bil­i­ties,” she told re­porters in Wash­ing­ton.

OLIVIER DOULIERY/AFP VIA GETTY IM­AGES

IMF chief econ­o­mist Gita Gopinath is call­ing for ac­tion to tackle “fi­nan­cial vul­ner­a­bil­i­ties.” .

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