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Yesterday the International Monetary Fund (IMF) its World Economic Outlook report. I saw the report as cautionary. I also suggested waiting for today’s IMF Global Financial Stability Report. Even a cursory reading of today’s report suggests that the IMF is recommending more than caution, but, however subtly, issuing just enough of a warning to be able to look back months from now and say, “We told you so.”
Consider these excerpts from the report and comments from IMF’s José Viñals:
- Low nominal growth would put pressure on debt-laden sovereign and private balance sheets, raising credit risks.
- Some markets show clear signs that liquidity conditions have worsened and that an accommodative monetary policy is masking underlying risks.
- Three percent of global output is at stake.
- Managing any outbreaks in financial contagion will require nimble and judicious use of available policy buffers.
- Benign conditions are set to evaporate as the credit cycle tightens in emerging markets.
- If we don’t get it right we could set the clock back in terms of growth.
- Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes.
- There is about $3 trillion of overborrowing or excess credit extended.
- Market liquidity, which is not low at present, is nevertheless much less resilient than we would have liked.
- While the growth slowdown in China is so far in line with forecasts, its cross-border repercussions appear greater than previously envisaged.
- The recommendation is for an urgent upgrade in policies, so as to avoid downside risks.
- At the very least, central banks would need to remain vigilant and be prepared to increase their stimulus programs should difficulties in emerging market countries spill over into the financial system.
- A collective effort to deliver a policy upgrade is needed urgently to face up to rising challenges in an uncertain world, to ensure financial stability and better growth prospects. Three percent of global output is at stake.
The report focused in part on the global impact of a potential failure of the mainland China to transform its growth from infrastructure development to commercial development.
The UK is particularly vulnerable to nightmares about the Chinese economy becoming reality. Banks headquartered in the UK have a great deal of exposure in the Chinese economy. Any increase in non-performing loans funded by British banks could be the first leaks in the dam. If that happens it will take more than a battalion of little Dutch boys to plug the holes in the dike.
In short, the IMF “is worried that large financial institutions, concerned for their own financial stability, will refuse to buy and sell stocks and bonds in the event of a shock, bringing global financial markets to a standstill.”
Please understand that I am not running around saying that the sky is falling. Nonetheless, I am trying to peel back the thin veil of verbal manipulation that the IMF is using to avoid widespread panic when what it is really saying is that we could be on the verge of that very thing.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
