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Impending US Debt Crisis Oct 1, 2015 – Prompts IMF’s Release of GLOBAL FINANCIAL STABILITY REPORT By Robin Barnes


Those living in the USA on October 1, 2015 were inundated with wall to wall coverage of yet another mass shooting at an institution of higher education.   Therefore, many missed the reports (relatively few and far between) about a letter received by members of Congress, warning that unless they take action swiftly and without fanfare, the emergency measures that enabled the Treasury Secretary to pay the bills, would run out by November 5, 2015 (tax receipts were lower than we previously projected, and trust fund investments were higher than projected).

Less than a week running, the International Monetary Fund issued a report as follows.

Policymakers Face Triad of Challenges to Ensure Financial Stability

  1. Financial stability not assured, 3 percent of global output at stake
  2. Risks in emerging markets remain elevated, with global implications
  3. Collective efforts to normalize monetary and financial conditions urgently needed

Relevant Edited Excerpts:

The Federal Reserve is poised to raise interest rates in the United States.

The European Central Bank policies have bolstered confidence in the euro area, where credit conditions are improving.

Domestic imbalances, slower growth, and lower commodity prices means that a buildup of credit in emerging market economies since the global financial crisis ($3.3 trillion in over-borrowing) has made them vulnerable to the expected increase in interest rates and potential economic downturns.

In the Eurozone, tackling the large amount of nonperforming loans and completing the banking union remain critical to consolidate financial stability.

In the United States, embarking on the much telegraphed, although unprecedented, process of increasing interest rates for the first time in nine years is going to be an important transition for global markets.

Recent episodes of market turmoil reveal that weak market liquidity amplifies shocks and acts as a source of volatility and contagion. Low interest rates for a long period of time and quantitative easing have compressed risks across a range of asset markets. Disruption is likely if the risks are repriced, creating fire sales, redemptions, and more volatility in global markets.

Leverage in investment funds also has the potential to amplify shocks—the Global Financial Stability Report points to $1.5 trillion in embedded leverage in investment funds through derivatives exposures.

These diverse challenges call for an urgent policy upgrade. Policy missteps or adverse shocks could result in global market turmoil that would ultimately stall global recovery.

Policymakers in advanced economies and emerging markets must confront the triad of challenges and upgrade policies in order to enhance confidence and build resilience.

The Eurozone and Japan need to continue to counter downward price pressures. Resolving nonperforming loans in euro area banks could deliver 600 billion euro in new lending capacity.

The United States should wait to raise rates until inflation rises and there is growth in the labor market, with gradual (read small) and well communicated future increases.

Building resilience and maintaining confidence in emerging markets will be crucial for corporations and banks. Maintaining sovereign investment-grade status is a priority. Managing any outbreak of financial contagion will require nimble and judicious use of available policy buffers.

The most important emerging market economy is China. Rebalancing and deleveraging will require an unprecedented level of care. The transition to a new growth model and a more market-based financial system require reform. The process will inevitably entail corporate defaults, removal of nonviable firms, write-offs on nonperforming loans, and strengthening of banks.

Oversight of liquidity in the asset-management industry avoids the risk of fire sales, and mutual standards for reporting derivatives leverage in investment funds, enable regulators and investors opportunities to evaluate the risks.

If a collective effort to deliver policy upgrade is rejected there will be no stability, balance, or sustainable growth: in fact, global output will be reduced by an estimated 3% in two years’ time.


Read Full report here http://www.imf.org/external/pubs/ft/survey/so/2015/POL100715A.htm


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