Risks to Financial Stability Increase, Bold Action Needed


By José Viñals

(Versions in  عربي中文EspañolFrançaisРусский日本語)

Our latest update of the Global Financial Stability Report has three key messages.

First, financial stability risks have increased, because of escalating funding and market pressures and a weak growth outlook.

Second, the measures agreed at the recent European leaders’ summit provide significant steps to address the immediate crisis, but more is needed. Timely implementation and further progress on banking and fiscal unions must be a priority.

And third, time is running out. Now is the moment for strong political leadership, because tough decisions will need to be made to restore confidence and ensure lasting financial stability in both advanced and emerging economies. It is time for action.

Now, why have financial stability risks increased?

Continue reading

Seven Billion Reasons to Worry: the Financial Impact of Living Longer


By S. Erik Oppers

Everyone wants at some point to stop working and enjoy retirement.  In these uncertain economic times, most people worry about their pension. Now take your worries and multiply those several billion times. This is the scale of the pension problem. And the problem is likely bigger still: although living longer, healthier lives is a good thing, how do you afford retirement if you will live even longer than previously thought?

This so-called longevity risk, as discussed in the IMF’s Global Financial Stability Report has serious implications for global financial and fiscal stability, and needs to be addressed now.

Here’s the issue: governments have done their analysis of aging largely based on best guesses of population developments. These developments include further drops in fertility and some further increase in longevity. The trouble is that in the past, longevity has been consistently and substantially underestimated. We all live much longer now than had been expected 30, 20, and even just 10 years ago. So there is a good chance people will live longer than we expect now. We call this longevity risk—the risk we all live longer than anticipated.

Risky business

Why is that a risk, you may ask. We all like to live longer, healthy lives. Sure, but let’s now return to those pension worries. If you retire at 65 and plan your retirement finances expecting to live another 20 years (assuming you have enough savings for at least that period), you would face a serious personal financial crisis if you actually live to 95, or— well in your 100s.

Continue reading

How to Exit the Danger Zone: IMF Update on Global Financial Stability


By José Viñals

(Versions in  عربي, 中文, EspañolFrançaisРусский日本語)

Since September of last year, risks to global financial stability have deepened, notably in the euro area.

However, over the past few weeks, markets have been encouraged by measures to provide liquidity to banks and sovereigns in the euro area. This recent improvement should not be taken for granted, as some sovereign debt markets remain under stress, and as bank funding markets are on life support from the European Central Bank (ECB).

Main sources of risk

Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.

Despite the recent improvements, sovereign financing stress has increased for many countries—with almost two-thirds of outstanding euro area bonds at spreads in excess of 150 basis points—and financing prospects are challenging. Markets remain very volatile and long-term foreign investors have sharply reduced their exposure to a number of euro area debt markets, including some in the core. Keeping these investors involved is essential to stabilizing markets.

Continue reading

Strong Leadership, Collective Action Key to Economic Recovery


By iMFdirect

The 2011 IMF-World Bank Annual Meetings are taking place in Washington DC as the global economy enters a dangerous new phase — financial markets jitters and risks to the recovery are giving everyone plenty to talk about.  Here are our ‘must reads’ for the meetings. Continue reading

The Danger Zone: Financial Stability Risks Soar


By José Viñals

(Versions in عربيFrançais日本語, and Русский)

We are back in the danger zone. Since the IMF’s previous Global Financial Stability Report, financial stability risks have increased substantially—reversing some of the progress that had been made over the previous three years.

 Several shocks have recently buffeted the global financial system: unequivocal signs of a broader global economic slowdown; fresh market turbulence in the euro area; and the credit downgrade of the United States.

This has thrown us into a crisis of confidence driven by three main factors: weak growth, weak balance sheets, and weak politics. Continue reading

Interest Rates and Investor Decisions: The Long and Short of It


By Erik Oppers

What drives the investment decisions of investors with a longer time horizon? Our research found these investors generally do not look at differences in interest rates 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.

So why all this talk about how low interest rates in advanced economies are “pushing” investment flows to emerging countries, where interest rates are generally higher—is this story wrong? Continue reading

Tough Political Decisions Needed to Fix the Financial System


   By José Viñals

(Versions in عربي,  中文EspañolFrançaisРусский)

It was fitting that I should present our latest assessment of global financial stability in Sao Paulo, the financial center of one of the leading emerging economies. In common with many of its peers in Latin America, Brazil is recovering strongly from the crisis. But new financial stability challenges are emerging in this, and other fast-growing regions.

Let me start with three key messages:

  •  First, financial risks have increased since April.
  • Second, as a result, policymakers in both advanced and emerging economies need to step up their efforts to preserve financial stability and safeguard the recovery.
  • And third, we have entered into a new phase of the crisis – a political phase- when tough political decisions will need to be made, because the window for substantial policy action is closing. Time is of the essence.  Continue reading

Global Challenges, Global Solutions


By iMFdirect

The IMF-World Bank Spring Meetings are upon us here in Washington DC.

With global challenges that require global solutions—the theme of the meetings—IMF Managing Director Dominique Strauss-Kahn reminds us that this is “not the time for complacency.”

Government ministers and officials, members of civil society organizations, journalists, and others are flocking to Washington DC this week to discuss and decide on key issues facing the global economy. Continue reading

Avoiding Another Year of Living Dangerously: Time to Secure Financial Stability


By José Viñals

In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath.

But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Durable financial stability has, so far, proven elusive.

Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies—while necessary to restart the economy—have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible. Continue reading

Reducing the Chance of Pulling the Plug on Liquidity


By Jeanne Gobat

The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets.

Many financial institutions were unable to roll over or obtain short term funding without sustaining significant losses. This threatened to sink them.

Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down and less stable—that is, they underestimated their contribution to systemic liquidity risk in good times, and did not bear the cost of their actions on others in bad times.

It only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. Continue reading

Follow

Get every new post delivered to your Inbox.

Join 742 other followers

%d bloggers like this: