Dhaka, Bangladesh
Global financial risks rising with trade tensions: IMF

Global financial risks rising with trade tensions: IMF

Leaders need to fix broken economic models, says Lagarde

Business Desk Risks to the global financial system have risen over the past six months and could increase sharply if pressures in emerging markets escalate or global trade relations deteriorate further, the International Monetary Fund said on Wednesday. The IMF, whose autumn meetings with the World Bank get under way on the Indonesian resort island of Bali this week, also noted that while the banking system has been shored up by regulators in the decade since the 2008 global financial crisis, easy financial conditions are contributing to a buildup of vulnerabilities such as high debt levels and “stretched” asset valuations. New bank resolution regimes meant to avoid future bailouts are largely untested, the Fund said in its biannual global financial stability update. “Near-term risks to global financial stability have increased somewhat,” the IMF said. “Overall, market participants appear complacent about the risk of a sharp tightening in financial conditions.” IMF capital markets director Tobias Adrian said potential shocks to the system could come in many forms, such as higher-than expected inflation that triggers a sharp jump in interest rates or a “disorderly” exit by Britain from the European Union. But the severity of the impact from such shocks will be determined by vulnerabilities including growing non-financial debt levels now exceeding 250 percent of GDP, a decline in underwriting standards outside the traditional banking sector and elevated asset prices that could drop sharply. “It’s this interaction between the buildup of vulnerabilities and the decline in asset prices that can generate adverse implications for macroeconomic activity,” Tobias told a news conference. The rapid build-up in debt in China in recent years also is a concern, although Chinese authorities have taken steps to rein in debt growth, he said. In the report, the IMF said economic growth appears to have peaked in some major economies while the gap between advanced countries and emerging markets was widening. The IMF on Tuesday cut its global growth forecasts due to an escalating U.S.-China trade war and growing financial strains on emerging markets The United States continues to grow strongly and the Federal Reserve raised interest rates for the seventh time in the last eight quarters at its latest policy meeting in September. U.S. stock markets are also at record highs. That contrasts with a slowing in the euro area and Japan. China’s economy is also showing signs of moderating and that could be exacerbated by its trade disputes with the United States, which has imposed tariffs on $250 billion worth of imports from Beijing and is threatening duties on $267 billion more. The normalization of monetary policy in the United States as well as a stronger dollar and escalation in trade tensions has already begun to affect emerging market economies, the Fund said. New IMF research shows emerging market countries excluding China could face debt portfolio outflows of up to $100 billion, a level last seen during the global financial crisis. The Fund cited a number of other near-term risks to financial stability including the possibility of a “no-deal” Brexit or renewed fiscal policy concerns in some highly indebted euro area countries. It also urged global regulators to keep in place measures taken since the financial crisis and both heighten supervision of market liquidity and raise the amount of capital banks have to set aside to cushion any downturn. “The financial regulatory reform agenda should be completed, and a rollback of reforms should be avoided,” the Fund said. “To adequately address potential systemic risks, financial regulation and supervision should be used more proactively.” In a rebuke to nationalist politicians pushing tariffs and protectionism, the international lender chief Christine Lagarde said Wednesday that World leaders need to fix global trading systems instead of trying to tear them down. Her comments come as a trade spat between China and the United States threatens economic growth around the world, with IMF experts warning of “new vulnerabilities” in the global system. “We need to work together to de-escalate and resolve the current trade disputes,” Lagarde said at an IMF and World Bank gathering in Bali. “We need to join hands to fix the current trade system, not destroy it,” she added. Around 32,000 members of the global financial elite are on the Indonesian holiday island for a week of discussions that have been clouded by US President Donald Trump’s America First trade policy. Trump has levied or threatened tariffs on goods from economies around the world, notably China, but also on traditional allies such as the European Union. A raising of US interest rates has also helped send emerging market currencies into a tail spin, as countries that borrowed heavily in dollars race to pay back their debt. The IMF’s latest report on world financial stability, released Wednesday, said global growth could be at risk if emerging markets deteriorate further or trade tensions escalate. “New vulnerabilities have emerged and the resilience of the global financial system has yet to be tested,” it said in the twice-yearly Global Financial Stability Report. Market participants “appear complacent” about the potential risks from a “sudden, sharp tightening of conditions” — like rising interest rates or declining access to capital. More tariffs and their countermeasures “could lead to a broader tightening of financial conditions, with negative implications for the global economy and financial stability,” the fund warned. Lagarde told her audience Wednesday that she did not feel overly gloomy about global conditions. “It’s tempting to be a bit depressed about this perspective but I’m actually hopeful because there is a clear appetite to improve and expand trade,” she said. Prominent US academic Jeffrey Sachs was less diplomatic in his assessment of Trump’s shepherding of American trade relationships, slamming the president’s repeated claims that deficits with China and other nations meant Americans were being taken advantage of. “Trade deficits don’t (necessarily) mean cheating by the other side… This is the United States trying stop China’s growth — it’s a terrible idea,” Sachs, director of the Center for Sustainable Development at Columbia University, told a seminar in Bali. “All the accusations against China are completely trumped up… Grossly exaggerated.” As interest rates rise in advanced economies, prompting investors to take their money in search of higher returns, the IMF said emerging economies should take steps to insulate themselves from an exodus of funds. That would include boosting foreign currency reserves that could be used in a crisis, as well as working with local bond markets to build a local investor base, rather than relying on financing from abroad. The fund also pointed to risks from high corporate debt and too much government borrowing, a hangover from fiscal stimulus measures and government rescue spending in the wake of the 2008 global financial crisis. Since the last stability report in April, global economic conditions have become less balanced, with a more pronounced divergence between advanced and emerging economies. Despite the Federal Reserve’s interest rate increases, financial conditions “have eased further” in the US as equity valuations have stayed lofty. Conditions in Europe and other major advanced economies have also remained “relatively easy,” although investors have pushed back their expectations for the European Central Bank to lift interest rates, the report said. In China, the situation remains “broadly stable,” although corporate debt is above historical levels and household borrowing is at the high end among emerging countries. “China is well aware and is taking steps to slow down the debt buildup,” said Vitor Gaspar, director of the IMF’s Fiscal Affairs Department. (Inputs taken from AFP, Reuters)

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