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IMF / INVESTMENT PRESSER
STORY: IMF / INVESTMENT PRESSER
TRT: 2.04
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE” ENGLISH / NATS
DATELINE: 13 SEPTEMBER, 2011 WASHINGTON, DC
RECENT 2011, INTERNATIONAL MONETARY FUND HEADQUARTERS, WASHINGTON DC
1. Wide shot, exterior IMF Headquaters
13 SEPTEMBER, 2011 WASHINGTON, DC
2. Wide shot, press conference
3. SOUNDBITE (English) Laura Kodres, Monetary and Capital Markets Department, IMF:
“Since the crisis began, they’ve moved into more liquid assets, those that can be sold easily without moving the price and into emerging market assets which are now viewed as safer than some of those in advanced economies.”
4. Cutaway, reporters
5. SOUNDBITE (English) Laura Kodres, Monetary and Capital Markets Department, IMF:
“Looking forward, we try to surmise how some of these long-term investors might react to the continuing low interest rate environment: one that hurts them greatly. The private pension plans of Canada, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and the United States are all in actuarial deficit, that is the current market value of their pension plan assets cannot cover what the plan owes its beneficiaries.”
6. Cutaway, reporters
7. SOUNDBITE (English) S. Erik Oppers, Monetary and Capital Markets Department, IMF:
“Sovereign investors can take advantage of these demand shifts and profit from taking on the longer term less liquid investments such as equities commodities and infrastructure that private investors now avoid. We don’t necessarily advocate this, but with their assets growing and the ability to act in the long term interest of their government sponsors, we think it will be a natural stabilizing extension of their current mandates.”
8. Cutaway reporters
9. SOUNDBITE (English) Srobona Mitra, Monetary and Capital Markets Department, IMF:
“Policymakers would be well advised to devote resources and coordinate with each other to better understand the sources of shocks. Amongst slow-moving indicators that signal a buildup in systemic risk, credit aggregates are central, but not the only ones. We find that simple indicators of credit growth that are relatively easy to track and measure across countries work pretty well.”
10. Cutaway reporters
11. SOUNDBITE (English) Srobona Mitra, Monetary and Capital Markets Department, IMF:
“Using data on 36 countries over time our analysis shows that when credit to GDP ratio is growing by more than 5 percent points together with equity prices growing by over 15% the probability of a financial crisis on average is above 20% in the next 2 years. Note that this gives policymakers ample time to try to avoid a crisis.”
12. Wide shot, presser
In a new study, the International Monetary Fund has found that long-term investors do not look at differences in interest rate among countries when deciding where to invest.
It turns out the factors they do consider in making these decisions are good and stable growth prospects, low country risks—including political and economic stability—and a stable exchange rate. This all makes good sense for long-term investors such as pension funds and insurance companies.
“Since the crisis began, they’ve moved into more liquid assets, those that can be sold easily without moving the price and into emerging market assets which are now viewed as safer than some of those in advanced economies,” said Laura Kodres of the IMF’s Monetary and Capital Markets Department.
Interest rates do not matter for these investors. The IMF looked at short-term interest rates, long-term interest rates, real interest rates, and nominal interest rates. Institutional investors did not respond to any of them, for investments in equities nor bonds.
For now, most of these institutional investors are biding their time, accepting lower returns without moving funds to countries with higher interest rates and perceived higher risk, or into other riskier domestic assets. The longer the low interest rates prevail, the more difficult the financial situation of these investors becomes and the higher the pressure for them to “search for yield.”
“Looking forward, we try to surmise how some of these long-term investors might react to the continuing low interest rate environment: one that hurts them greatly. The private pension plans of Canada, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and the United States are all in actuarial deficit, that is the current market value of their pension plan assets cannot cover what the plan owes its beneficiaries,” Kodres said.
The IMF said that the change in investor behavior may open up opportunities for investors of sovereign wealth.
“Sovereign investors can take advantage of these demand shifts and profit from taking on the longer term less liquid investments such as equities commodities and infrastructure that private investors now avoid. We don’t necessarily advocate this, but with their assets growing and the ability to act in the long term interest of their government sponsors, we think it will be a natural stabilizing extension of their current mandates,” said the study’s author S. Erik Oppers.
In a second study released Tuesday, the IMF said rapid credit growth, increased asset prices, greater reliance on banks’ foreign-borrowing and an appreciating currency are signs a country could be headed for a financial crisis.
In the wake of the global economic crisis, which began as a financial crisis in the United States in 2008, this new report, part of the IMF’s Global Financial Stability Report, provides countries a practical framework to help them spot potential trouble on the financial horizon, and choose the best policy to respond.
“Policymakers would be well advised to devote resources and coordinate with each other to better understand the sources of shocks. Amongst slow-moving indicators that signal a buildup in systemic risk, credit aggregates are central, but not the only ones. We find that simple indicators of credit growth that are relatively easy to track and measure across countries work pretty well,” said Srobona Mitra, the study’s author.
Credit growth is the result of either a good shock to the economy, such as increased productivity, or a bad shock, such as real estate bubbles that led to the most recent global crisis. Other indicators need to accompany credit growth for policymakers to distinguish between the two types of shocks.
The same indicators also work across different exchange rates regimes, which means a wide variety of countries are able to use the indicators to help spot a potential crisis. The IMF tested a variety of models across a large sample of countries, including advanced and emerging economies.
“Using data on 36 countries over time our analysis shows that when credit to GDP ratio is growing by more than 5 percent points together with equity prices growing by over 15% the probability of a financial crisis on average is above 20% in the next 2 years. Note that this gives policymakers ample time to try to avoid a crisis,” Mitra said.
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