IMF: Global financial stability risks rise
The risks to global financial stability have increased over the past six months and the turbulence that roiled markets early this year could be renewed if policymakers don’t take steps to safeguard the financial system, the International Monetary Fund said Wednesday.
In its global financial stability report, the IMF blamed the higher risks on falling commodity prices, China’s economic slowdown and the limited ability of overtaxed monetary policy to respond to a more uncertain global economy.
Early this year, global stock markets, including in the U.S., plunged, corporate borrowing costs rose and fears of recession swirled. Markets have reversed course since early February.
But at the IMF’s spring meetings in Washington, Jose Vinals, the fund’s financial counsellor, disagreed with the view that the turmoil “is now safely behind us,” instead saying it’s a “warning signal that more needs to be done.”
“If not, market turmoil may recur and intensify, and could create a pernicious feedback loop of fragile confidence, weaker growth, tighter financial conditions, and rising debt burdens,” Vinals said at a news conference. “That could tip the global economy into economic and financial stagnation.”
In that scenario, he said, global economic output could be 4% lower over the next five years than the IMF’s baseline forecast.
Among the IMF’s proposals:
►In advanced economies, especially the euro area, struggling banks that account for 15% of bank assets should address elevated levels of bad loans, a legacy of the financial crisis. Vinals said. Europe also must deal with an oversupply of banks and complete a banking union that would guarantee customer deposits in a crisis.
Policymakers, meanwhile, should step up regulation of life insurance companies that are more susceptible to low profits now that interest rates have been pushed into negative territory by the European Central Bank and several countries.
And in the U.S., lawmakers should renew efforts to reduce the dominance of government-sponsored mortgage giants Fannie Mae and Freddie Mac, whose losses during the housing crisis put U.S. taxpayers at risk.
►In China, corporate profits are suffering as the country struggles through a challenging shift to an economy rooted in consumption rather than investment and exports. The share of debt held by firms that don’t earn enough to cover their interest payments has risen to 14% of the debt of all publicly-traded Chinese companies. That's more than triple the level in 2010. Corporate bank loans potentially at risk in China total $1.3 trillion, or 7% of the nation’s gross domestic product. Vinals called that sum “manageable, given China’s bank and policy buffers and continued strong growth in the economy.”
Still, he said China should address the corporate debt burden, strengthen banks and bolster regulation to support “an increasingly complex financial system.”
►Other emerging markets, face slower growth, tighter credit conditions and volatile capital flows amid the sharp drop in commodity prices. Since many weak commodity-related companies are government owned, government balance sheets could be affected. Vinals urged the countries to use their capital cushions to strengthen government and bank balance sheets.