The IMF’s Risk Map Detours
The April IMF Global Financial Stability Report highlighted advanced economy bank and sovereign debt overhangs as lingering perils, but also cited generic and country-specific emerging market capital flow complications as nascent risks. In the US, Europe and Japan deleveraging has been slow and capital raising for euro area banks in particular has lagged. Short-term bond rollover requirements following state rescues there are heavy, and asset quality in property and government paper portfolios continues to slide and will be underscored by the latest stress testing round. European sovereigns have become a “high-spread” asset class, sidelining the traditional investment-grade investor base and placing the central bank in an unaccustomed buyer role that for commercial and prudential reasons cannot be sustained indefinitely. Annual interest costs in the 20 percent of revenue range are onerous and Treasury and JGB yields will also inevitably rise from historic lows, especially as worries mount about long-term fiscal paths. Corporations, especially small and midsize firms, and households with job and housing value losses are also under unabated balance sheet pressure. Against this background foreign direct equity and lending lines to developing economies have been flat while securities allocation dominates. This group has a combination of slimmer output gaps and inflation spurts that warrant monetary tightening; G-3 quantitative easing shows “little evidence” of triggering the liquidity wave, according to the Fund. In its view emerging market corporate access may be overdone, as lower-rated names tap local and external debt channels. Leverage is above historic averages and a small interest rate shift could endanger servicing capacity. For stocks, systemic bubble scope is “remote” but valuations in many cases are frothy.
The MENA geopolitical spillover may have industrial world effects with $350 billion in bank exposure to the region by BIS data, and petrodollar recycling to key financial centers likely to follow alternate patterns short of outright disruption. State-owned banks in large markets like Brazil and China have been on a credit tear. more than doubling operations from the early crisis period through end-2010. Wholesale borrowing rather than deposit buildup has facilitated expansion and possible overheating should concern supervisors. On other topics, Dubai’s debt workout after a prolonged saga still leaves risk management and transparency gaps, and ETFs which have mushroomed to over $200 billion for the emerging market universe may introduce fresh distortions and threats to orderly well-monitored transactions. They also insert another level of legal, policy and counterparty complexity that could frustrate simple bets on next-generation business superpower status, the review cautions.
