IMF

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Bank for International Settlements warns of growing fragility
AFP DECEMBER 08, 2014 7:28AM

THE Bank for International Settlements has warned that global financial markets appear to be increasingly fragile despite bullish sentiment.

The Basel-based institution, considered the central bank for central banks, also voiced concern in its quarterly report about the impact of the rising US dollar and falling oil prices, particularly on emerging economies.

Claudio Borio, the head of the BIS monetary and economic department, highlighted events in mid-October when stock prices fell sharply and US Treasury bonds were “exceptionally volatile” — even more than at the height of the crisis triggered by the collapse of Lehman Brothers in 2008.

“And yet, just a few days later, the previous apparent calm had returned.

“To my mind, these events underline the fragility — dare I say growing fragility — hidden beneath the markets’ buoyancy,” he said.

Global stocks are surging on hopes that the world’s biggest economy is recovering, with a surprisingly robust US jobs report for November powering Wall Street to record highs last week.

The dollar has also strengthened against the euro and the yen, as the central banks of the single European currency zone and Japan push interest rates to record lows to chase an elusive growth.

At the same time, oil prices have slumped by 40 per cent since June because of oversupply — the third largest fall in the last 50 years.

Mr Borio said the diverging developments were expected to “leave a profound imprint on the financial and macroeconomic scene”.

Emerging market economies expected to be hardest hit because “the out-size role that commodities and international currencies play there makes them particularly sensitive to the shifting conditions,” he said.

Emerging economies have racked up to $US3.1 trillion ($3.4 trillion) in dollar-denominated debt by mid-2014.

A continued appreciation of the dollar would therefore increase debt burdens, Mr Borio said.

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Has the IMF made a mistake?
1176 words
4 Jul 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Blame game A probe of the IMF's leadership on the saga over the past five years reveals a series of blunders, writes John Kehoe.

A provocative question is being whispered inside the International Monetary Fund's headquarters in Washington and furiously debated in international economy policy circles. Has the venerable International Monetary Fund stuffed up the Greece debt crisis?

At stake is not only the credibility of the world's emergency lender, but the reputation of its managing director Christine Lagarde, who has signalled she will seek reappointment to the top job when her term expires next July.

The left-wing Syriza Party defiantly skipped a €1.5 billion payment ($2.2 billion) due to the IMF on Tuesday, leaving Greece teetering on the brink of a full-blown sovereign debt default.

On Thursday, the IMF said the crisis-ridden country needs €52 billion of extra funds over the next three years and large-scale debt relief to create "breathing space".

Whatever the outcome in Greece over the coming days and weeks, a probe of the IMF's leadership on the debt saga over the past five years reveals a series of mistakes.

Domenico Lombardi, a former executive board member of the IMF and World Bank, says the fund's bailout program that began in 2010 "reflected a political decision that disregarded any underlying economic logic".

"As a result of that, Greece has lost a quarter of aggregate income and one can hardly blame the Greeks, so the IMF bears some responsibility," says Lombardi, now a director at the Centre for International Governance Innovation.

After two bailouts co-ordinated by the IMF in 2010 and 2012, worth about €240 billion, Greece faces its fifth default since 1800.

There is little dispute that the IMF's tough medicine of pension cuts, wage freezes and tax increases drove the Greek economy into a deeper hole. Unemployment has barely recovered from a peak of 28 per cent and the economy has shrunk 25 per cent over four years.

When the IMF board debated the fate of Greece on May 9, 2010, some members raised serious doubts about the fund's "benign" outlook for Greece, and its optimism on the forecast results of the severe austerity and prescribed economic reforms.

Swiss executive director René Weber reportedly told IMF colleagues he had "considerable doubts about the feasibility of the program".

"Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term," Weber said, according to minutes leaked to The Wall Street Journal.

Argentina and Brazil shared the sceptiscim, warning "Greece might end up worse off after implementing this program" and that "it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece's private debt holders, mainly European financial institutions".

With the wider eurozone in the depths of a deep recession, policymakers feared a Greek bankruptcy could spread financial contagion like wildfire. German and French banks were among the largest creditors of Greece and its banks.

Conveniently, European countries controlled about one-third of the fund's voting rights. Rather than imposing losses on banks, the IMF lent its own emergency lending rules to partner with European governments to loan €110 billion to Greece.

"The Greek taxpayer was forced to take on the burden of protecting the euro area and global economy from possible contagion," says Ajai Chopra, a former IMF official who designed Ireland's financial rescue in 2010.

Critics say the IMF should have written down the debt and forced banks to wear losses, rather than forcing unprecedented growth-sapping budget cuts.

Desmond Lachman, an American former IMF official, says the fund should have known that 10 percentage points of GDP budget adjustment to a fixed-exchange rate system would "tank the economy".

"The IMF should have required an early restructuring of Greece's privately-held sovereign debt rather than let the private creditors get out," says Lachman, now a scholar at the American Enterprise Institute.

Those directly involved, such as Douglas Rediker, the US IMF board representative between 2010 and 2012, says such criticisms are easy to make with "20-20 hindsight".

"At the time, the outcome of restructuring Greek debt held by European banks would almost certainly have been a wildly damaging systemic event where Greece and the rest of Europe, and potentially the world, would have been much worse off," says Rediker, a visiting fellow at Peterson Institute for International Economics.

Yet critics like Brookings Institution economist Barry Bosworth argue the "eurocentric" IMF should never have lent the money to a sinking Athens ship because it was Europe's problem to deal with.

Under the fund's 2003 exceptional access framework, the IMF was barred from lending to countries with unsustainable debts. The IMF board pushed through an exemption, enabling risky loans to be made in the event of a "high risk of international systemic spillover", says John Taylor, a former under secretary of US Treasury for international affairs.

"The fact that the original framework was broken at the same meeting that the Greek loan was approved provides strong evidence that the framework was broken to allow for the loan," Taylor says.

The IMF originally said if Greece undertook drastic reforms it could reduce its deficits and grow the economy. But a subsequent ex-post evaluation by the IMF of the program in 2013 admits to "notable failures".

Rediker admits the economic assumptions turned out to be "wildly optimistic".

"There is a lot of blame to go around on that," he says.

To be clear, Lagarde was French finance minister at the time of the first failed rescue attempt and not the head of the IMF. She was, however, a board member of the partnering European Financial Stability Facility.

By the time the March 2012 program was executed, Lagarde was in charge after replacing the sex scandal-plagued Dominique Strauss-Kahn. The IMF granted an extra €28 billion to Athens out of €130 billion from public European institutions. Greece pledged to slash spending, encourage hiring and business expansion, and improve tax collection. When Lagarde accused Greeks of being rampant tax dodgers, it provoked a furious reaction in Athens.

Greek debt held by public institutions, such as the IMF and European governments, was written down by 60 per cent. But Chopra says the extra spending cuts and tax rises "killed the economy", making it difficult to implement required reforms to improve economic growth.

Despite missteps on Greece, most believe Lagarde has generally done a good job running the IMF. Emerging markets are unlikely to unite behind a single candidate for managing director next year, after failing to agree on the proposed Mexican central banker candidate Agustín Carstens against Lagarde in 2011.

"Assuming Greece can be relatively contained, I don't think this will be a blow to Lagarde," Lombardi says. "After all, the Europeans have run the IMF since day one."

And don't Greeks know it.


Fairfax Media Management Pty Limited

Document AFNR000020150703eb740001a

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Moody’s cuts G20 growth forecast

• BUSINESS SPECTATOR
  
• AUGUST 28, 2015 11:03AM
  

Michael Roddan
[Image: michael_roddan.png]
Reporter

[b]Global ratings agency Moody’s has downgraded its growth forecast for the major economies of the world as China’s slowdown weighs on global demand, while commodity-exporting nations are affected by weak prices.[/b]
Moody’s today said it was revising its economic growth forecast for the G20 group, of which Australia is a member, to 2.8 per cent in 2016, down from 3.1 per cent.
The G20 economies account for around 85 per cent of the world’s GDP and cover two-thirds of the global population.
Moody’s said the downward revision was due to the impact of a “more marked” slowdown expected in China, compounded by the “prolonged negative effects” of low commodity prices on G20 producers than had been expected earlier.
China’s growth forecast for 2016 was downgraded to 6.3 per cent for 2016, from 6.5 per cent, after the slowdown of Chinese exports and investment continued to slow into the third quarter of 2015. China’s official figures put its GDP growth at an annual rate of 7 per cent, according to the most recent data, but the figures are widely met with scepticism.
Moody’s said China’s employment growth was weakening in a more pronounced way, pointing to a broadly-based deceleration in the Chinese economy.
“Ongoing policy support from the Chinese government is likely to only partly offset the underlying slowdown in the Chinese economy,” the ratings agency said.
Slowing growth in China also makes a significant rebound in commodity prices in the near term unlikely, Moody’s said.
Bloomberg’s commodities index, which aggregates 22 prices, recently fell to its lowest point in 13 years. The price of iron ore has touched its lowest point in a decade in recent months, while the prices of oil, copper, zinc, nickel and coal have also traded a multi-year lows.
“A more prolonged period of low commodity prices will lead to muted export revenues and investment for commodity-exporting G20 economies,” Moody’s senior vice president Marie Diron said.
Negative GDP growth in Brazil and Russia, two of the largest G20 member nations, was now expected to extend their 2015 recessions, Moody’s said. Russia’s economy is heavily dependent on oil exports, while Brazil’s exports are concentrated in iron ore, petroleum, other metals and agricultural commodities.
“The recent fall in commodity prices and further depreciation of the currencies exacerbate an already unfavourable domestic economic environment in both countries,” Moody’s said.
Meanwhile, Korea and Japan were likely to face dampened Chinese demand for their manufactured goods and exports.
“A more marked slowdown in China, a major trade partner for both economies, will likely weigh on corporates’ and consumers’ willingness and ability to spend, hampering domestic demand,” Moody’s said.
A stronger dollar and lower oil prices led to Moody’s revising its US growth forecast to 2.6 per cent in 2016, down from 2.8 per cent.
Moody’s said the recent falls on global stock markets would not have a direct significant impact on economic activity in most countries, including China.

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‘Shadow banking’ on the rise, hits $US80 trillion

• AFP
  
• NOVEMBER 13, 2015 7:19AM
  

[Image: 161003-3153ca7e-8980-11e5-aeb4-355430273bb1.jpg]
The Financial Stability Board, chaired by Mark Carney, says shadow banking transactions grew by $US2 trillion across 2014. Source: AP
[b]The value of unregulated “shadow banking” rose to some $US80 trillion last year, according to a report by the Financial Stability Board (FSB), which advises G20 states on banking reform and oversees regulation of the global financial system.[/b]
The report, issued ahead of the upcoming G20s summit in Antalya, said shadow banking transactions not subject to regulatory oversight grew by $US2 trillion across 2014 on a broad measure covering 26 jurisdictions and the euro area as a whole, representing some 80 per cent of global GDP and 90 per cent of global financial system assets.
The FSB, which advises G20 countries on banking reform and was set up six years ago after the implosion of Lehman Brothers, publishes annual reports into the parallel banking system under its remit to promote internationally transparent financial stability.
Shadow banking involves transactions outside traditional banking, including hedge and investment funds.
The Switzerland-based body, chaired by chairman Mark Carney, governor of the Bank of England, is also tasked with identifying potential weak points in the global financial system.
The FSB said it has devised a monitoring framework to track shadow banking developments to enable the identification of systemic risks, “initiating corrective actions where necessary.”
The organisation said this year it has added a more narrowly-focused “economic function” overview of shadow banking for its annual monitoring of the non-bank financial sector in order to devise policy responses aimed at risk mitigation.
The FSB, which works in conjunction with national and international financial regulators, estimated that under the new, activity-based, narrow measure of shadow banking, the sector was worth $US36 trillion in 2014, from $US35 trillion in 2013 — equivalent to some 30 per cent of overall non-bank financial sector assets and 60 per cent of the GDP of the 26 participating jurisdictions
By comparison, the traditional banking sector was last year worth $US135 trillion, 6.4 per cent up on 2013.
For Mr Carney, “non-bank financing is a welcome additional source of credit to the real economy. The FSB’s efforts to transform shadow banking into resilient market-based finance, through enhanced vigilance and mitigating financial stability risks, will help facilitate sustainable economic growth”.
But at the same time he stressed the FSB needed to be vigilant in looking to transform shadow banking into a robust source of market finance and at a level of risk which would not destabilise the financial system.
Australia’s Glenn Stevens, chairman of the FSB Standing Committee on Assessment of Vulnerabilities said: “The annual shadow banking monitoring exercise is an important mechanism for identifying potential financial system vulnerabilities in the non-bank sector.
“The activities-based approach in this year’s report enhances our understanding of the evolving composition of this sector and potential risks.”’
AFP