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10-04-2014, 10:23 AM
This sick world simply can't get off the infusion of liquidity... keep watching out for 2017 when the laymen rejoice over the long overdue real recovery...
Published April 10, 2014
Monetary easing may manage a Goldilocks exit
But IMF official also warns of possibility of bumpy exit
By
anthony rowley
In Tokyo
print |email this article
THE global financial system may be able to make a "Goldilocks exit" from monetary easing, International Monetary Fund (IMF) financial counsellor Jose Vinals suggested yesterday. But markets should also brace themselves against the possibility of a "bumpy exit", he warned.
Mr Vinals was speaking in Washington at the launch of the IMF's latest Global Financial Stability Report which, like the fund's World Economic Outlook published a day earlier, painted a generally market-reassuring picture of the global outlook.
By contrast, the latest IMF Fiscal Monitor, also published yesterday, warned against what acting director of the organisation's fiscal affairs department Sanjeev Gupta said are "elevated fiscal risks" in advanced economies and "rising vulnerabilities" in emerging economies.
"Global financial stability is improving - we have begun to turn the corner," Mr Vinals declared at a press briefing. "But it is too early to declare victory as there is a need to move beyond liquidity dependence by overcoming the remaining challenges to global stability."
A "Goldilocks exit" from monetary easing in the United States is possible, Mr Vinals suggested - "not too hot, not too cold, just right. This is our baseline, most likely outcome. After a turbulent start, the normalisation of monetary policy has begun".
Improved communications is smoothing market adjustment, while "green shoots" of economic recovery are increasingly visible - easy money is leading to credit creation which is spurring growth.
"The Fed is taking its foot off the accelerator gradually through a smooth tapering path," Mr Vinals said. "Our baseline is for the Fed to begin lightly touching the brakes with policy rates starting to rise by mid-2015, all the while keeping the car driving smoothly down the road to growth and recovery."
This is taking place against the background of a strengthening global economy, he noted. "The US economy is gaining strength; in Europe, better policies have led to substantial improvements in market confidence; and, in Japan, Abenomics has made a good start as deflationary pressures are abating and confidence for the future is rising."
Emerging market (EM) economies, having gone through several recent bouts of turmoil, are also adjusting policies in the right direction, Mr Vinals said. But a bumpy exit (from monetary easing) - "though not our base line - is also possible".
"This adverse scenario could be produced by growing concerns in the US about financial stability risks, or higher-than-expected inflation. The result would likely be a faster rise in policy rates and term premiums, widening credit spreads, and a rise in financial volatility that could spill over to global markets."
EMs are especially vulnerable to a tightening in the external financial environment, after a "prolonged period of capital inflows, easy access to international markets, and low interest rates. This has induced substantial amounts of borrowing, particularly by emerging market companies".
Rising interest rates, weakening earnings, and depreciating exchange rates could put substantial pressure on EM corporate balance sheets under our adverse scenario. EM corporates owing almost 35 per cent of outstanding debt could find it hard to service their obligations.
In China, "achieving an orderly deleveraging of the shadow banking system is a key challenge", Mr Vinals said. "Non-bank financial institutions have become an important source of financing in China, doubling since 2010 to 30-40 per cent of GDP.
"This non-bank lending activity, though a sign of the system becoming more diversified, is also prone to risks as savers may not realise the higher risks that lie behind the more attractive rates of return offered by non-bank savings products due to the perception of implicit guarantees."
Published April 10, 2014
Monetary easing may manage a Goldilocks exit
But IMF official also warns of possibility of bumpy exit
By
anthony rowley
In Tokyo
print |email this article
THE global financial system may be able to make a "Goldilocks exit" from monetary easing, International Monetary Fund (IMF) financial counsellor Jose Vinals suggested yesterday. But markets should also brace themselves against the possibility of a "bumpy exit", he warned.
Mr Vinals was speaking in Washington at the launch of the IMF's latest Global Financial Stability Report which, like the fund's World Economic Outlook published a day earlier, painted a generally market-reassuring picture of the global outlook.
By contrast, the latest IMF Fiscal Monitor, also published yesterday, warned against what acting director of the organisation's fiscal affairs department Sanjeev Gupta said are "elevated fiscal risks" in advanced economies and "rising vulnerabilities" in emerging economies.
"Global financial stability is improving - we have begun to turn the corner," Mr Vinals declared at a press briefing. "But it is too early to declare victory as there is a need to move beyond liquidity dependence by overcoming the remaining challenges to global stability."
A "Goldilocks exit" from monetary easing in the United States is possible, Mr Vinals suggested - "not too hot, not too cold, just right. This is our baseline, most likely outcome. After a turbulent start, the normalisation of monetary policy has begun".
Improved communications is smoothing market adjustment, while "green shoots" of economic recovery are increasingly visible - easy money is leading to credit creation which is spurring growth.
"The Fed is taking its foot off the accelerator gradually through a smooth tapering path," Mr Vinals said. "Our baseline is for the Fed to begin lightly touching the brakes with policy rates starting to rise by mid-2015, all the while keeping the car driving smoothly down the road to growth and recovery."
This is taking place against the background of a strengthening global economy, he noted. "The US economy is gaining strength; in Europe, better policies have led to substantial improvements in market confidence; and, in Japan, Abenomics has made a good start as deflationary pressures are abating and confidence for the future is rising."
Emerging market (EM) economies, having gone through several recent bouts of turmoil, are also adjusting policies in the right direction, Mr Vinals said. But a bumpy exit (from monetary easing) - "though not our base line - is also possible".
"This adverse scenario could be produced by growing concerns in the US about financial stability risks, or higher-than-expected inflation. The result would likely be a faster rise in policy rates and term premiums, widening credit spreads, and a rise in financial volatility that could spill over to global markets."
EMs are especially vulnerable to a tightening in the external financial environment, after a "prolonged period of capital inflows, easy access to international markets, and low interest rates. This has induced substantial amounts of borrowing, particularly by emerging market companies".
Rising interest rates, weakening earnings, and depreciating exchange rates could put substantial pressure on EM corporate balance sheets under our adverse scenario. EM corporates owing almost 35 per cent of outstanding debt could find it hard to service their obligations.
In China, "achieving an orderly deleveraging of the shadow banking system is a key challenge", Mr Vinals said. "Non-bank financial institutions have become an important source of financing in China, doubling since 2010 to 30-40 per cent of GDP.
"This non-bank lending activity, though a sign of the system becoming more diversified, is also prone to risks as savers may not realise the higher risks that lie behind the more attractive rates of return offered by non-bank savings products due to the perception of implicit guarantees."