IMF tells regulators to brace for global ‘liquidity shock’

Financial engineering that preceded the last two financial crises is back, International Monetary Fund warns

The Telegraph, By Ambrose Evans-Pritchard, April 15

An illusion of liquidity has beguiled financial markets across the world and spawned some of the worst excesses seen on Wall Street in modern times, the International Monetary Fund has warned.

Investors are borrowing money to buy shares on the US stockmarket at a torrid pace and are resorting to the same sorts of financial engineering that preceded the last two financial crises.

“Margin debt as a percentage of market capitalisation remains higher than it was during the late-1990s stock market bubble. The increasing use of margin debt is occurring in an environment of declining liquidity,” said the IMF in its Global Financial Stability Report.

“Lower market liquidity and higher market leverage in the US system increase the risk of minor shocks being propagated and amplified into sharp price corrections,” it said.

The Telegraph: IMF fears ‘cascade’ of woes as Fed crunch nears

The United States is poised to raise rates much more sharply than markets expect, risking a potential storm for global asset prices and a dollar shock for much of the developing world, the International Monetary Fund has warned.

The IMF fears a “cascade of disruptive adjustments” as the US Federal Reserve finally pulls the trigger for the first time in eight years, ending an era of cheap and abundant dollar liquidity for the international system.

The Fed’s long-feared inflexion point is doubly treacherous because investors seem ill-prepared for what lies ahead, and levels of dollar debt outside the US have reached an unprecedented extreme. The Fund said future contracts are pricing in a “much slower” pace of monetary tightening than the Fed itself is forecasting.

Bloomberg Business: World Braces for Taper Tantrum II Even as Yellen Soothes Nerves

The world economy is about to discover if to be forewarned by the Federal Reserve is to be forearmed.

Two years since the Fed triggered a selloff of their assets in the so-called “taper tantrum,” the finance chiefs of emerging markets left Washington meetings of the International Monetary Fund praising Chair Janet Yellen for the way she is signaling plans to raise U.S. interest rates.

The test now is whether developing nations have done enough to insulate their economies from the threats of a higher U.S. dollar and capital flight once the Fed boosts borrowing costs for the first time since 2006. How successful they are will help determine the strength of global growth that’s already taking a hit from weaker expansions in China and Brazil.

“The Fed is trying its best to be as transparent as possible, to explain its considerations,” Tharman Shanmugaratnam, Singapore’s finance minister, said in an interview. “But it doesn’t mean that ensures us of an orderly exit. One way or another there’s going to be some disturbance.”

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