European Life Insurers: Unsustainable Business Model


By Reinout De Bock, Andrea Maechler, and Nobuyasu Sugimoto

(Versions in Français and deutsch)

Low interest rates in the euro area pose substantial challenges to the life insurance industry. Insurers—particularly in Germany and Sweden—offer their clients long-term policies, sometimes more than 30 years, without holding assets of a correspondingly long duration. Moreover, many policies contain generous return guarantees, which are unsustainable in today’s low interest rate environment.

In 2014, stress tests showed European life insurers are vulnerable to a “Japanese-like” scenario.

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Ten Take Aways from the “Rethinking Macro Policy: Progress or Confusion?”


blanchBy Olivier Blanchard

On April 15-16, the IMF organized the third conference on “Rethinking Macro Policy.

Here are my personal take aways.

1. What will be the “new normal”?  

I had asked the panelists to concentrate not on current policy challenges, but on challenges in the “new normal.” I had implicitly assumed that this new normal would be very much like the old normal, one of decent growth and positive equilibrium interest rates. The assumption was challenged at the conference.

On the one hand, Ken Rogoff argued that what we were in the adjustment phase of the “debt supercycle.” Such financial cycles, he argued, end up with debt overhang, which in turn slows down the recovery and requires low interest rates for some time to maintain sufficient demand.  Under that view, while it may take a while for the overhang to go away, more so in the Euro zone than in the United States, we should eventually return to something like the old normal.

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Unclogging Euro Area Bank Lending


By Will Kerry and Jean Portier

A year ago our research showed Europe had an €800 billion stock of bad loans.  In our latest Global Financial Stability Report we show that the problem has now grown to more than €900 billion.  This stock of nonperforming loans is concentrated in the hardest hit economies, with two-thirds located in just six euro area economies. The European Central Bank’s Asset Quality Review  confirmed this picture, which revealed that the majority of banks in many of these economies had high levels of nonperforming assets (see chart 1).

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Managing Capital Flows in Frontier Economies


By Jonathan D. Ostry, Atish R. Ghosh, and Mahvash S. Qureshi 

There has been a remarkable increase in financial flows to frontier economies from private sources which, in relation to their economic size, are now on par with those to emerging economies (see chart).

Ostry Capital Flows

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Financial Risks Rise Amid Uneven Global Economic Recovery


GFSR

By José Viñals

(Versions in عربي and Español)

The three main messages from this Global Financial Stability Report are:

  1. Risks to the global financial system have risen since October and have rotated to parts of the financial system where they are harder to assess and harder to address.
  2. Advanced economies need to enhance the traction of monetary policies to achieve their goals, while managing undesirable financial side effects of low interest rates.
  3. To withstand the global crosscurrents of lower oil prices, rising U.S. policy rates, and a stronger dollar, emerging markets must increase the resilience of their financial systems by addressing domestic vulnerabilities.

Let me now discuss these findings in detail. 

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Warning—Falling (U.S. Treasury) Objects


By Nigel Chalk and Jarkko Turunen

WHD.US Falling Yields.warningsignThe remarkable collapse in the price of oil—a key global price that has virtually halved in the space of just a few months—has received a lot of attention lately.

Meanwhile, another significant shift has taken place in recent months that is just as surprising and has wide-reaching global implications—the dramatic drop in long-term U.S. Treasury bond yields. The last time we saw 10-year Treasury bond yields this low was in early May 2013. As many will remember, this didn’t last long and when it corrected, it set off a burst of volatility across emerging markets.

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Portfolio Investment in Emerging Markets: More Than Just Ebb and Flow


Evan PapageorgioBy Evan Papageorgiou

When the U.S. Federal Reserve first mentioned in 2013 the prospect of a cutback in its bond buying program, markets had a “taper tantrum.” Many emerging markets saw large increases in volatility, even though outflows from their domestic markets were small and short-lived. Now the Fed has ended its bond buying and is looking ahead to rate hikes, and portfolio flows continue to arrive at the shores of emerging market economies. So everything’s fine, right? Not quite.

In our latest Global Financial Stability Report, we show that the large concentration of advanced economy capital invested in emerging markets acts as a conduit of shocks from the former to the latter.

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