I.M.F. warns of Global Financial Risk
Policy makers at a meeting of the International Monetary Fund said that high debt in China and a lack of spending in Europe, among other factors, could provoke a market convulsion.
A more immediate concern drew the attention of policy makers at the International Monetary Fund’s semiannual meetings last week: inflated asset prices and increasing levels of debt overseas.
“A major lesson of the last crisis is that accommodative monetary policy contributed to financial excesses,” said Lucas Papademos, a former vice president of the European Central Bank. “We are pursuing a similar policy for good reason. But there are limits — if you do this for too long, risks in the financial markets will materialize.”
Mario Draghi, the president of the E.C.B., echoed concerns on Saturday when he said that beyond concerns about the global economy, one of the main topics of discussion was “increasing financial risk-taking” by investors, especially nonbank institutions.
Yet, more immediate action is needed after a purchase by the European Central Bank of Italian, Spanish and Greek government bonds, in large quantities.
In effect, bond market investors are stomping on the gas pedal while banks, burdened by persistent regulatory demands, still have their foot on the brake.
“How am I supposed to lend any money if I have to go through a stress test every six months?” said the chairman of a large European bank who spoke on the condition of anonymity because he did not want to offend his new regulator, the E.C.B.
“We cannot create minirecessions at the first sign of financial instability,” Mr. Constâncio said, arguing that regulators in different countries needed to address these issues by imposing restrictions on the investment firms that engaged in these activities.
In the financial stability report it released last week, the I.M.F. pointed out that asset management firms have increased bond purchases from emerging markets to close to $2 trillion today from $265 billion in early 2000.
“Interest rates are going to go up in 2015 — why are the markets getting all whipsawed?” said James P. Gorman, chief executive of Morgan Stanley, speaking at a luncheon conference on Friday. “Rates are going up because the U.S. economy is doing better — and that is a good thing.”
Source: NYT- I.M.F. warns of Global Financial Risk
