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STORY: IMF / GLOBAL FINANCIAL STABILITY REPORT
TRT: 2.34
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH /NATS
DATELINE: 9 APRIL 2014, WASHINGTON DC
1. Med shot, podium
2. Med shot, journalists
3. SOUNDBITE: (English), Jose Vinals, Financial Counsellor, IMF:
“First, the United States must get its exit right – in terms of monetary policy. And that means in terms of timing, in terms of execution, in terms of communication.”
4. Wide shot, press room
5. SOUNDBITE: (English), Jose Vinals, Financial Counsellor, IMF:
“With rising interest rates, weekend earnings and depreciation pressures, these could put substantial pressure on emerging market corporate balance sheets under ours adverse scenario. Indeed in this scenario, we find in the report that emerging market corporates owing almost 35% of outstanding debt, of corporate debt, could find it hard to service their obligations.”
6. Med shot, journalists
7. SOUNDBITE: (English), Jose Vinals, Financial Counsellor, IMF:
“Non-bank financial institutions what is normally called shadow banking have grown at the very important rates in the past and they have a very important source of financing in China, doubling since 2010 to reach 30-40% of GDP. And this is something which is on one hand a good news because it is a sign that a financial system has become more diversified that there is financial deepening in the development, but at the same time, one needs to be careful because it is also prone to risks.”
8. Med shot, photographer
9. SOUNDBITE: (English), Jose Vinals, Financial Counsellor, IMF:
“While so far spillovers surrounding developments in Ukraine have remain relatively limited and confined, geopolitical risks remain elevated, and this could pose a shock to global financial market.”
10. Close up, page of report
11. SOUNDBITE: (English), Jose Vinals, Financial Counsellor, IMF:
“The euro area needs to finish the cleansing of both banks and corporate balance sheets, start banking union right and definitely address the problem of coorporates and develop non-bank sources of credit for smaller companies. All of this is a paramount for confidence and for the stronger recovery.”
12. Med shot, panelists leaving
Over the past six months, financial stability has broadly improved in advanced economies and has deteriorated in emerging economies, according to the International Monetary Fund’s latest Global Financial Stability Report.
Easy financial conditions due to low interest rates in advanced economies have meant many economies rely on “liquidity crutches.” The IMF said it is time for financial systems to move beyond this dependence on easy money and transition to an environment of self-sustaining growth.
The transition to greater stability is far from complete, and the conditions necessary for a stable financial system are not yet fully in place, as evidenced by recent bouts of financial turbulence, according to the IMF.
Engineering a successful shift from financial markets driven by low interest rates in advanced economies to one driven by self-sustaining growth will require strong actions by policymakers in advanced and emerging market economies.
The gradual shift to self-sustaining growth is most advanced in the United States, where the “green shoots” of economic recovery are visible. Yet a number of financial stability risks remain.
“First, the United States must, must get its exit right in terms of monetary policy. And, that means in terms of timing, in terms of execution and in terms of communication,” said José Viñals, Financial Counsellor and head of the IMF’s Monetary and Capital Markets Department.
One is the emergence of vulnerabilities in some pockets of U.S. credit markets, such as high-yield bonds and leveraged loans, where underwriting standards have weakened. The increased activity in these markets—and the possible mispricing of risk—reflect investors’ search for higher returns on their investments and the continuing drive by corporates to take advantage of easy lending conditions.
Other risk factors could amplify the effect of potential shocks. These include sharply reduced market liquidity and the rapid growth of credit-focused mutual funds and exchange traded funds. These investment vehicles are more prone to sudden redemptions from investors than other traditional holders of leveraged loans. The concern is that if investors seek to withdraw massively from investment vehicles focused on relatively illiquid high-yield bonds or leveraged loans, the pressure could lead to fire sales in credit markets and rapid increases in yields.
U.S. policymakers must carefully manage these growing risks to ensure financial stability and avoid global spillovers. Macroprudential policies, for example, can help reduce excessive risk taking by market participants. These actions are essential to help the United States achieve a smooth exit from unconventional monetary policies—which remains the most likely scenario.
The favorable tailwinds from easy external financial conditions and strong credit growth have now subsided. Macroeconomic and financial imbalances have built up during the period of extraordinary accommodative monetary policy, as private and public balance sheets have become more indebted.
Countries such as Brazil, Indonesia, India, and Turkey faced increased market pressures over the past year because investors are increasingly looking at these imbalances to differentiate among markets and asset classes.
Swift policy actions to enhance the credibility of policy frameworks have helped to alleviate some of these pressures, but more remains to be done.
Viñals said some companies in emerging market may be particularly vulnerable.
“With rising interest rates, weakened earnings and depreciation pressures, this could put substantial pressure on emerging market corporate balance sheets under our adverse scenario. Indeed, in this scenario, we find in the report that emerging market corporates owing almost 35% of outstanding debt -- of corporate debt -- could find it hard to service their obligations,” said Viñals.
The IMF has conducted an in-depth analysis of emerging market corporate balance sheets, focusing on the share of corporate debt held by weaker, highly leveraged firms, known as “debt at risk”. In a severe and adverse scenario, where borrowing costs escalate and earnings deteriorate significantly, debt at risk could increase by $740 billion, to 35 percent of total corporate debt in the sample.
The impact of any shock could be magnified by a growing “systemic liquidity mismatch.” For example, in some local-currency sovereign bond markets where foreign investors now play a greater role, there is now a stark contrast between the potential scale of capital outflows and the diminished capacity and willingness of international banks to intermediate these flows. This mismatch could magnify the impact of any shock and broaden the impact on asset prices across countries.
Policymakers in emerging markets need to maintain credible macroeconomic policy frameworks and buffers. They also need to take macroprudential measures to safeguard both banks and nonbanks. This is particularly relevant in China, where the growth in non-bank lending has boosted corporate leverage.
“Non-bank financial institutions, what is normally called the shadow banking, have grown at very important rates in the past and they have become a very important source of financing in China, doubling since 2010 to reach 30-40% of GDP. And this is something, which, on the one hand, is good news because it’s a sign that the financial system has become more diversified, that there is financial deepening and development. But, at the same time, one needs to be careful because it’s also prone to risks,” he said.
On Tuesday, the IMF’s World Economic Outlook forecast suggested growth in Russia would decline in light of the crisis in Ukraine. Viñals also pointed to the situation as a possible threat to stability.
“While, so far, spillovers surrounding developments in Ukraine have remained relatively limited and confined, geopolitical risks remain elevated and this could pose a shock to global financial markets,” he said.
Market sentiment toward European sovereigns and banks has improved, particularly in stressed euro area countries. This reflects reforms taken at the national and European levels, and growing confidence that the forthcoming asset quality review and stress tests by the European authorities will further strengthen banks. Yet Viñals said important challenges remain.
“The euro area needs to finish the cleansing of both banks and corporate balance sheets, start banking union right and, definitely, address the problem of corporates and develop non-bank sources of credit for smaller companies. All of this is paramount for confidence and for stronger recovery,” said Viñals.
The Global Financial Stability Report also calls for additional measures to speed up the resolution of nonperforming loans and to improve corporates’ access to credit. The report says policymakers should increase incentives for bank provisioning and write-offs, reform legal frameworks to facilitate timely resolution, and promote a secondary market for nonperforming loans. The IMF also suggests that market regulators facilitate the listing of high-yield bonds by smaller corporates, and policymakers should reassess the regulatory impediments to the securitization of loans.
The resulting strengthening of bank and corporate balance sheets should help reinforce the improved optimism in financial markets, and improve the flow of credit to support the recovery.
