Back-to-School Blogs


By iMFDirect

As you trudge back to the office or cubie with a little sand still crunching in your backpack, you know the holiday is over. To help you catch up, here are some blogs to re-read to get you back into the swing of things.

Remember Europe? I thought so. The European Central Bank is center stage this week as inflation in Europe has hit a trough, which reminded me of our blog about deflation back in March that rattled a few cages.

Which brings us to what will or won’t happen with global interest rates, and their impact on well, pretty much everyone. We’ve analyzed the tea leaves so you don’t have to.

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Euro Area – Q&A on QE


By Reza Moghadam and Ranjit Teja 

As inflation has sunk in the euro area, talk of quantitative easing (QE)—and misgivings about it—have soared. Some think QE is not needed; others that it would not work; and yet others that it only creates asset bubbles and may even be “illegal.” In its latest report on the euro area, the IMF assesses recent policy action positively but adds that “… if inflation remains too low, the ECB should consider a substantial balance sheet expansion, including through asset purchases.” Given all the reservations, would the juice be worth the squeeze?

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What a Drag: The Burden of Nonperforming Loans on Credit in the Euro Area


By Will Kerry, Jean Portier, Luigi Ruggerone and Constant Verkoren 

High and rising levels of nonperforming loans in the euro area have burdened bank balance sheets and acted as a drag on bank profits. Banks, striving to maintain provisions to cover bad loans, have had fewer earnings to build-up their capital buffers. This combination of weak profits and a decline in the quality of bank assets, resulting in tighter lending standards, has created challenging conditions when it comes to new lending.

We took a closer look at this relationship and the policies to help fix the problem in our latest Global Financial Stability Report because credit is the grease that helps the economy function.

The stock of nonperforming loans has doubled since the start of 2009 and now stands at more than €800 billion for the euro area as whole (see chart). Around 60 percent of these nonperforming loans stem from the corporate loan book.

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A Missing Piece In Europe’s Growth Puzzle


moghadamsmallBy Reza Moghadam

Even before the latest euro area GDP numbers and Italian elections cast a shadow over the continent, economists were struggling to reconcile the steady improvement in market sentiment with the more downbeat data on the economy, production, orders, and jobs.

This video looks at this puzzle from a somewhat different perspective than the usual—and still correct—narrative of weak banks and over-indebted public sectors caught in a vicious cycle. More specifically, we examine the role of household and corporate balance sheets in the countries under financial market stress and the implications for policy priorities.

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We May Have Avoided the Cliffs, But We Still Face High Mountains


WEO

by Olivier Blanchard

Version in Español  and عربي

Optimism is in the air, particularly in financial markets. And some cautious optimism may indeed be justified.

Compared to where we were at the same time last year, acute risks have decreased. The United States has avoided the fiscal cliff, and the euro explosion in Europe did not occur. And uncertainty is lower.

But we should be under no illusion. There remain considerable challenges ahead. And the recovery continues to be slow, indeed much too slow.

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Time Not On Our Side: Tough Decisions Needed to Strengthen Financial Stability


By José Viñals

(Versions in  عربي中文EspañolFrançaisРусский日本語)

Recent policy actions in Europe, the United States, in emerging markets, and here in Japan, where I’m attending the IMF-World Bank annual meetings, have improved investor sentiment and helped markets rebound in recent months.

Yet our latest assessment is that confidence is still very fragile and risks have increased, when compared to the IMF’s last report in April. Policymakers need to do more to gain lasting stability.

The principal risk remains the euro area. The forces of financial and economic fragmentation have widened the divide between countries at the core and the “periphery” of the euro zone. Faltering confidence and policy uncertainty have led to a pullback of cross-border private capital flows from the periphery—quite an extraordinary phenomenon within a currency union.

This has driven up funding costs to governments and banks, as well as for companies and households, and, in turn, threatening a vicious downward economic spiral.

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Not Making the Grade: Report Card on Global Financial Reform


by Laura Kodres

Despite a host of reforms in the right direction, the financial structures that were in place before the global crisis have not actually changed that much, and they need to if the global financial system is to become a safer place.

Although the intentions of policymakers are clear and positive, the system remains precarious.

Our new study presents an interim report card on progress toward a safer financial system. Overall, there is still a long way to go.

How we measure progress

In our study, we first tried to pay attention to those features of financial systems related to the crisis—the large dominant, highly interconnected institutions, the heavy role of nonbanks, and the development of complex financial products for instance—features that need to be addressed in some way.

To do this we needed to construct measures of these features in a way that would allow us to gauge how well the reforms are working toward changing them. We looked at a lot of data, but we focus on three types of features.

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