The Ties That Bond Us: What Demand For Government Debt Can Tell Us About the Risks Ahead


by Serkan Arslanalp and Takahiro Tsuda

It’s not news that emerging markets can be vulnerable to bouts of market volatility. Investors often pull sudden stops—they stop buying or start selling off their holdings of government bonds.

But what has become apparent in recent years is that advanced economy government bond markets can also experience investor outflows, and associated runs. At the same time, some traditional and new safe haven countries have seen their borrowing costs drop to historic lows as they experience rising inflows from foreign investors.

Our new research shows that advanced economies’ exposure to refinancing risk and changes in government borrowing costs depend mainly on who is holding the bonds— the demand side for government debt.

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Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia


By Anoop Singh

European banks play an important role in supplying credit to several Asian economies. What happens if they start reducing their exposure to the region?

The largest borrowers from European banks are Australia, Hong Kong SAR, Korea, Malaysia, New Zealand, Singapore, and Taiwan Province of China, while China, India, and the economies of South East Asia generally have smaller liabilities.

Among European banks, those from the United Kingdom have a particularly significant presence in Asia. For most regional economies, the nonbank private sector—businesses and households—is the main recipient of credit from foreign banks as a whole.

Prominent role

European banks play a prominent role in the areas of trade credit and specialized project financing. In several Asian economies, however, lending by local subsidiaries and branches is funded primarily by local deposits, reducing potential deleveraging pressures.

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How to Get the Balance Right: Fiscal Policy At a Time of Crisis


By Anders Borg and Christine Lagarde

Last autumn was a turbulent time for Europe. The debt crisis deepened and financial markets became embroiled in turmoil, driven by fears of widespread restructuring of public debt. The crisis has harmed growth, increased unemployment, and left a large number of people less protected.

We are now seeing some signs of stabilization. Most countries are reducing their deficits and even if debt ratios are still rising, the return back to fiscal health has begun.

The International Monetary Fund and the Swedish Ministry of Finance are hosting an international conference in Stockholm on May 7-8, with the purpose of sharing knowledge and providing guidance on the best way to achieve fiscal consolidation, and on the role that effective fiscal policy frameworks and institutions can play in this endeavor.

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Jobs and Growth: Can’t Have One Without the Other?


By Min Zhu

(Version in Español, in عربي))

As Frank Sinatra crooned about love and marriage, so it seems about jobs and growth:

“This I tell ya, brother, you can’t have one without the other.”

The IMF’s latest World Economic Outlook projects global growth of 3 ½ percent this year. To the person on the street, what matters is how this growth translates into jobs and wages. The news on the jobs  front, unfortunately, remains grim.

Five years after the onset of the Great Recession, 16 million more people are likely to remain unemployed this year than in 2007. This estimate is for a set of countries for which the IMF forecasts unemployment rates; adding in some countries for which the International Labour Organization provides forecasts only boosts the number.

The bulk of this increase in unemployed people has been in the so-called advanced economies (the IMF’s term for countries with high per capita incomes), as shown in the chart below.

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Continuing the Momentum—Asia’s Updated Economic Outlook


By Anoop Singh

Asia’s leadership of the global economic recovery is continuing unabated. And, even though heightened risks mean there may be tough times ahead again, the region is well equipped to handle them.

Asia’s remarkably fast recovery from the global financial crisis continued in the first half of 2010, despite the recent tensions in global financial markets. In fact, GDP growth in the first quarter was generally stronger than we anticipated in our Regional Economic Outlook in April. And high-frequency indicators suggest that Asian economic activity remained brisk in the second quarter. Even more notable, this is true both for economies that escaped a recession in 2009, thanks to their relatively larger domestic demand bases (China, Indonesia, and India), and for the more export-oriented economies such as Japan, the Newly Industrialized Economies (NIEs), and the rest of the ASEAN.

Two growth engines

What explains the strong economic momentum across the region? It is simple. The two “engines of growth” that spurred Asia’s recovery in 2009— exports and private domestic demand—have remained robust in 2010.

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