How Much Finance Is Too Much: Stability, Growth & Emerging Markets


By Ratna Sahay, Martin Čihák, and Papa N’Diaye 

The world still lives in the shadow of the global financial crisis that began in the United States in 2008.  The U.S. experience shone a spotlight on the dangers of financial systems that have grown exponentially and beyond traditional banks. It triggered a rethinking of the extent and speed of the expansion of a country’s financial sector, and raised questions about which policies promote a safe financial system.

In our new study, we emphasize that the most commonly used indicator—bank credit—is not sufficient to measure the size and scope of a country’s financial development. We create a comprehensive index for over 170 countries to answer several policy questions from the perspective of emerging markets.

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Making Small Beautiful Again: The Challenge of SME Problem Loans in Europe


By Yan Liu, Kenneth Kang, Dermot Monaghan, and Wolfgang Bergthaler

Six years after the global financial crisis, Europe continues to be weighed down by high levels of corporate debt and millions of nonperforming loans. Small and medium-sized enterprises (SMEs) bear a disproportionately heavy burden. Their nonperforming loan ratios are on average more than double those of their larger corporate cousins. This is worrisome. SMEs are the lifeblood of the European economy, comprising 99 percent of all businesses and employing nearly two of every three workers in Europe. Given the importance of smaller businesses to the economy, addressing their problem loans could lay the foundation for a more robust and sustainable economic recovery.

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Resolving Residential Mortgage Distress: Time to Modify


By Jochen Andritzky

(Versions in Español)

In housing crises, high mortgage debt can feed a vicious circle of falling housing prices and economic slowdown. As a result, more households default on their mortgages and the crisis deepens.  A new IMF Working Paper studies the differences in the housing crises and policy responses in Iceland, Ireland, Spain, and the United States, and argues that crisis policies geared to provide temporary debt service relief for struggling households, followed by durable loan modifications, can help break this vicious circle.

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Investment in the Euro Area: Why Has It Been So Weak?


By Bergljot Bjørnson BarkbuS. Pelin Berkmen, and Hanni Schölermann

Investment in the euro area, and particularly private investment, has not recovered since the onset of the global financial crisis.

In fact, the decline in investment has been much more drastic than in other financial crises; and is more in line with the most severe of these crises (see Chart 1). The October 2014 World Economic Outlook showed that many governments cut investment because their finances became strained during the crisis. In addition, housing investment collapsed in some countries, reflecting a natural scaling back after an unsustainable boom. But what is holding back private non-residential investment?

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Battling Global Unemployment: Too Soon to Declare Victory


Prakash LounganiBy Prakash Loungani

(Version in Français and Español)

Seven years after the onset of the Great Recession, the global unemployment rate has returned to its pre-crisis level: the jobless rate fell to 5.6% in 2014; essentially the same as in 2007, the year before the recession (chart 1, left panel).

Global Unemployment 1

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Housing Bubbles: An Ounce of Prevention is Worth a Pound of Cure


By Kevin Fletcher and Peter Kunzel

The main features of boom-bust cycles in housing markets are by now all too familiar.

During booms, conditions such as lax lending standards and low interest rates help drive up house prices and with them mortgage debt.

When the bust arrives, over-indebted households find themselves underwater on their mortgages— owing more than their homes are worth.

Feeling the pinch of reduced wealth and access to credit, households, in turn, rein in consumption. At the same time, lower house prices cause investment in new houses to tumble.

Together, these forces significantly depress output and increase unemployment. Non-performing loans increase, and banks respond by tightening credit and lending standards, further depressing house prices and adding to the vicious cycle.

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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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