Delamaide: Rotation of risk
It’s hard to assess,
The kaleidoscope of risk has shifted in the global economy in the wake of plunging commodities prices, the higher dollar and the impact of loose monetary policies, top officials of the International Monetary Fund said Wednesday.
Risks have rotated in three ways, José Viñals, head of the IMF’s monetary and capital mar- kets department, said: from banks to non-banks, from solvency risks to liquidity risks and from advanced economies to emerging market economies.
Viñals, who also is financial counselor to IMF Managing Director Christine Lagarde, spoke at a press conference to present the semiannual Global Financial Stability Report. The briefing was part of this week’s activities surrounding the spring meetings of the World Bank and IMF.
“Risks have increased since October,” Viñals said, “to parts of the system that are harder to assess and harder to address.”
The European Central Bank’s move to quantitative easing, for instance, pushing interest rates lower by injecting more money into the system through asset purchases, creates risks for medium-size life insurance companies in the region, who may have trou- ble meeting their solvency ratios.
In the meantime, Viñals said, the U.S. Federal Reserve may have trouble executing a “smooth normalization” of monetary policy as financial markets seem to expect a slower pace of monetary tightening than some of the Fed policymakers.
While the quantitative easing by the ECB and the Bank of Japan provides an important stimulus to economic recovery in these areas, it must be accompanied by other measures.
In Europe, national authorities “must tackle non-performing loans in the banking system,” the IMF official said, to improve credit flow. Banks with lots of bad loans on their books lend less, and this is slowing recovery.
“They must deal with the stock of bad loans,” Viñals said, by finding more efficient ways of restructuring and writing off the bad debt. “This requires dedicated attention.”
The drop in the price of oil and other commodities is creating problems for emerging market exporting countries, many of which have borrowed heavily on the basis of projected revenue. The sharp increase in the value of the dollar — brought on by the shift in Fed monetary policy — exacerbates the problem.
It is not only public sector debt, but corporate debt that poses risks in many of these countries, Viñals said.
“You have to know if this debt is properly hedged,” he said, calling for micro- and macro-prudential vigilance in these countries.
Many of the corporations exposed to foreign currency debt are already weak and could impact banks that are in many cases weak themselves