“The IMF warned that asset prices around the globe aren’t adequately reflecting the hazards from investors moving into riskier markets with support from central banks’ extraordinary action in recent years…

…Recent selloffs in bond, equity and currency markets in recent months may just be a taste of the turbulence yet to come, Mr. Viñals said. A “disorderly” return to more normal pricing for riskier assets could cause “a vicious cycle of fire sales, redemptions and more volatility,” he said. In a worst-case scenario, the fund estimated that broad turmoil—selloffs in equities, financial assets and bonds, and spike borrowing costs—could slash around 2.5 percentage points off economic growth in rich countries through 2017. Those advanced economies are only expected to expand by 2.2% over the next two years. “That is a substantial decline against a fairly low growth rate to begin with,” the IMF’s financial counselor warned.”, Ian Talley, “IMF: Emerging-Market Troubles Risk Triggering Asset Fire Sales”, The Wall Street Journal, October 18, 2015

“In other words, the IMF is saying that central bankers’ monetary policies have distorted markets and fooled investors into bidding up assets to levels that are not commensurate with their risk. This is why I and others believe that the Fed is the source of a lot of our assets bubbles and busts, financial instability/volatility, destruction of firms and loss of jobs, and economic crises.”, Mike Perry, former Chairman and CEO, IndyMac Bank

October 7, 2015, Ian Talley, Wall Street Journal

Markets

IMF: Emerging-Market Troubles Risk Triggering Asset Fire Sales

Over-borrowing by developing nations may total $3 trillion, the fund says

José Viñals of the IMF, center, says recent market selloffs may be just a taste of the turbulence to come.

José Viñals of the IMF, center, says recent market selloffs may be just a taste of the turbulence to come. PHOTO: SHAWN THEW/EUROPEAN PRESSPHOTO

By Ian Talley

LIMA, Peru—Global markets should brace for more turmoil as a reckoning from years of gorging on cheap debt nears, the International Monetary Fund warned Wednesday.

The fund, in its semiannual assessment of risks to the global financial system, said the fallout from the end of easy-money policies by central banks could stall the world’s economic expansion, expose lofty asset prices and weigh on overextended lenders.

“Policy missteps or adverse shocks could result…in prolonged global market turmoil that would ultimately stall economic recovery,” said José Viñals, the IMF’s top financial counselor.

Investors already are pulling cash out of developing economies in droves as growth prospects dim, commodity prices plunge and borrowing costs rise. The IMF warned that asset prices around the globe aren’t adequately reflecting the hazards from investors moving into riskier markets with support from central banks’ extraordinary action in recent years.

Recent selloffs in bond, equity and currency markets in recent months may just be a taste of the turbulence yet to come, Mr. Viñals said. A “disorderly” return to more normal pricing for riskier assets could cause “a vicious cycle of fire sales, redemptions and more volatility,” he said.

In a worst-case scenario, the fund estimated that broad turmoil—selloffs in equities, financial assets and bonds, and spike borrowing costs—could slash around 2.5 percentage points off economic growth in rich countries through 2017. Those advanced economies are only expected to expand by 2.2% over the next two years. “That is a substantial decline against a fairly low growth rate to begin with,” the IMF’s financial counselor warned.

The IMF estimates developing nations—led by China—may have over-borrowed by roughly $3 trillion, and is warning that those countries could face a wave of corporate defaults. The fund estimates around 25% of China’s corporate debt is at risk, especially in the real estate and construction sectors, and including many state-owned firms.

That “will unavoidably entail some corporate defaults, the exit of a number of nonviable firms, and write-offs on nonperforming loans,” he said.

Corporate borrowing is a potential problem across the emerging-market banking sector, which accounts for more than two-thirds of lending to those firms, according to the IMF. After years of lending, many of those banks now have thinner capital buffers to protect against bad loans.

That excess borrowing could put sovereign balance sheets at risk because many of those firms have close ties to the state. It risks deteriorating growth prospects further as banks raise borrowing costs and have to replenish their capital cushions. And it fuels capital flight.

The Institute of International Finance last week estimated investors are pulling out $1 trillion this year from emerging markets as their outlooks dim. The banking industry group said emerging-market woes could hit the U.S., triggering a correction in U.S. financial-asset prices.

Large institutional investors could exacerbate financial instability by stampeding through markets, fostering volatility as they reshape their outlooks. Many investment funds also may have much larger “hidden” exposures to losses than reported as they leverage their assets in derivative markets.

An IMF analysis of major bond funds, for example, found $1.5 trillion dollars in “embedded” leverage through derivatives, making their exposures three times greater on average than reported.

Also, as institutional investors sought returns through an unprecedented easy-money era, many bought assets that aren’t quickly tradable. Bulking up on such illiquid assets could create havoc for those investors if they need to sell out quickly, the IMF said.

The IMF maintained its call for the Federal Reserve to hold off until next year on its first rate increase in nearly a decade, saying moving too soon could stall the U.S. recovery and fuel debt problems in emerging markets. The IMF’s view offers support for finance ministers and central bankers meeting in Lima, Peru, this week for the fund’s annual meetings who want to press Fed Chairwoman Janet Yellen to delay a decision into 2016.

The fund said the Fed should wait until seeing signs of inflation moving toward its target to avoid being forced to stall its tightening cycle, or even reverse course, as several central banks across the world have been forced to do.

Ms. Yellen and other Fed officials are still signaling plans for a rate increase this year.

Posted on October 9, 2015, in Postings. Bookmark the permalink. Leave a comment.

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