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IMF / GLOBAL FINANCIAL STABILITY REPORT PRESSER
STORY: IMF / GLOBAL FINANCIAL STABILITY REPORT PRESSER
TRT: 2.29
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS
DATELINE: 9 OCTOBER 2013, WASHINGTON DC, UNITED STATES
1. Wide shot, officials at presser
2. Med shot, officials at presser
3. Med shot, journalists at presser
4. SOUNDBITE (English) Jose Viñals, Financial Counselor, IMF:
“We are on the road. We have the map. And, now policymakers need to steer carefully to navigate the bumps in the road so that we can all arrive safely at our destination.”
5. Cutaway, cameramen
6. SOUNDBITE (English) Jose Viñals, Financial Counselor, IMF:
“Default – that we think is a very low probability event – but this would be something which would have very serious consequences through financial markets, both for the United States and for the rest of the world. So, it is completely of the essence that the U.S. political machinery gets its act together and ends this impasse.”
7. Cutaway, photographers and cameraman
8. SOUNDBITE (English) Jose Viñals, Financial Counselor, IMF:
“I think it’s very important that the balance sheet assessments, including the stress tests, that is going to be conducted by the European authorities is tough, deep, because that’s the only way to provide transparency and further bolster the confidence in European banks on the part of markets.”
9. Cutaway, journalist asking question
10. SOUNDBITE (English) Jose Viñals, Financial Counselor, IMF:
“The shadow banking is less regulated, or not regulated at all, compared to the banking sector. And therefore there is the potential for excesses to appear. So, it is very important that the Chinese authorities continue enhancing the monitoring of the shadow banking activities in order to detect potential pockets of systemic risks.”
11. Cutaway, reporter
12. SOUNDBITE (English) Jose Viñals, Financial Counselor, IMF:
“China needs to rein in the rapid growth of credit because, otherwise, over time this is going to lead to higher non-performing loans and this would be a challenge. But, you want to do this in a way that doesn’t lead to an abrupt closing of the source of credit to the economy because that would create very important problems of a sharp slowdown.”
13. Various shots, end of presser
Policymakers need to carefully navigate a series of important transitions facing the global financial system, according to the IMF’s latest Global Financial Stability Report. A failure to implement effective policies and reforms could potentially derail a smooth transition to greater financial stability.
Jose Viñals, Financial Counsellor and head of the IMF’s Monetary and Capital Markets Department said, “we are on the road. We have the map. And, now policymakers need to steer carefully to navigate the bumps in the road so that we can all arrive safely at our destination.”
The IMF’s analysis outlined five transitions with global impact:
the expected unwinding of accommodative monetary policy in the United States; a move to a more balanced and sustainable financial sector in emerging economies; the drive to bolster weak banks and corporates in the euro area; efforts to reinvigorate Japan’s economy through “Abenomics”; and the strengthening of global financial regulation.
Viñals warned that the ongoing U.S. government shutdown and looming battle over the government’s debt ceiling could “derail” the U.S. economic recovery.
He said, “default – that we think is a very low probability event – but this would be something which would have very serious consequences through financial markets, both for the United States and for the rest of the world. So, it is completely of the essence that the U.S. political machinery gets its act together and ends this impasse.”
Once those issues are resolved, the primary challenge for policymakers is to manage the current side effects—and the eventual withdrawal—of easy money policies such as low interest rates and bond buying by the U.S. central bank.
Given the prospect of higher interest rates and greater volatility, investors will naturally adjust their portfolios by reducing their fixed income holdings. But there is a risk that by selling too much too fast, long-term interest rates could rise more sharply than presently anticipated.
One of the challenges is the sheer magnitude of the likely portfolio adjustment. The IMF estimates that, since 2009, cumulative U.S. mutual fund inflows into fixed income have exceeded their historical trend by more than $5 trillion. This has raised the risk of large withdrawals in the event of monetary tightening.
Another challenge is the “weak links” in the U.S. shadow banking system, such as mortgage real estate investment trusts. Like the structured investment vehicles and the conduits that mushroomed before the crisis, mortgage real estate investment trusts are highly leveraged and susceptible to funding runs. They could be forced to sell their asset holdings quickly, causing disruption in the mortgage-backed securities market, which could spread to broader asset markets.
Engineering a smooth transition to normal monetary policy will require a clear and well-timed communication strategy by the U.S. central bank to minimize interest rate volatility. It will also require effective strategy execution, according to the IMF. Increased oversight of the overall risks in the shadow banking system and more transparency will be essential to preserve financial stability.
Many emerging market economies are increasingly sensitive to changes in easy money policies in advanced economies.
This is because foreign investors have crowded into local markets and may withdraw.
The IMF estimates that, since 2008, cumulative foreign inflows into local bond markets have exceeded their long-term structural trend by about $470 billion. This amounts to more than 5 percent of advanced economy GDP.
While foreign investors play a bigger role in local debt markets, market liquidity has deteriorated in recent years. This makes local interest rates more sensitive to changes in investor sentiment. At the same time, corporate balance sheets have weakened, financial vulnerabilities are rising, and economic growth is slowing.
A day after the Chinese Academy of Social Sciences reported China’s “shadow banking” sector has grown to nearly 40 percent of the country’s GDP, Viñals noted the importance of government action.
He said, “the shadow banking is less regulated, or not regulated at all, compared to the banking sector. And therefore there is the potential for excesses to appear. So, it is very important that the Chinese authorities continue enhancing the monitoring of the shadow banking activities in order to detect potential pockets of systemic risks.”
On Tuesday, the IMF projected China’s growth to decelerate slightly from 7 and a half percent this year to 7 and a quarter percent in 2014. Viñals identified another area of concern.
He said, “China needs to rein in the rapid growth of credit because, otherwise, over time this is going to lead to higher non-performing loans and this would be a challenge. But, you want to do this in a way that doesn’t lead to an abrupt closing of the source of credit to the economy because that would create very important problems of a sharp slowdown.”
In the euro area, policy actions at the regional and national levels have helped reduce funding pressures on sovereigns and banks. However, continuing financial fragmentation has increased bank lending rates in stressed euro area economies.
The Global Financial Stability Report also shows that a significant share of the corporate debt in stressed economies is now owed by companies with weak debt servicing capacity. This debt overhang can affect the banking system through losses on corporate loans.
The IMF estimates that, even if financial fragmentation were reversed over the medium-term, a persistent debt overhang would remain, amounting to almost one-fifth of the combined corporate debt of Italy, Portugal, and Spain.
How can policymakers bolster weak banks and corporates? First, the corporate debt overhang needs to be addressed. This may involve debt cleanups, improvements to bankruptcy frameworks, or special asset management companies to restructure loans.
Second, the planned balance sheet assessment and stress tests by the European authorities are a golden opportunity to conduct a thorough and transparent review of bank asset quality and to identify capital shortfalls. But credible backstops need to be put in place before the exercise is concluded to offset any identified shortfalls.
Viñals said, “I think it’s very important that the balance sheet assessments, including the stress tests, that is going to be conducted by the European authorities is tough, deep, because that’s the only way to provide transparency and further bolster the confidence in European banks on the part of markets.”
Japan needs to implement a complete policy package under the ”Abenomics” framework. A failure to enact the planned fiscal and structural reforms could re-ignite deflation and could intensify financial stability risks.
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