Fri, Apr 12, 2019 - Page 10 News List

Debt putting strain on economy: IMF

PROTECTION CALL:The ‘Global Financial Stability Report’ said that investors might get spooked if there is a sharp slowdown or if central banks start raising rates again


Rising corporate and government debt levels, and a sharp increase in more risky lending, could leave the global economy vulnerable to another severe downturn, the IMF warned on Wednesday.

While the concerns “aren’t all setting off alarm bells just yet,” governments will face challenges in balancing the need to tighten up oversight of the financial sector at a time when the global economy is slowing, Monetary and Capital Markets Department head Tobias Adrian said.

The IMF’s semi-annual Global Financial Stability Report found vulnerabilities are on the rise across advanced and emerging-market economies, which could worsen if economies slow or if interest rates rise sharply, Adrian said.

He urged governments to take protective steps now and “resist the call to roll back reforms.”

“There is no room for complacency,” he told reporters. “The intensification of trade tensions and the threat of a disordered Brexit have dented the investor confidence.”

The buildup of debt is apparent for governments and corporations, in advanced and developing nations, the report said.

“In the United States, the ratio of corporate debt to GDP is at record-high levels. In several European countries, banks are overloaded with government bonds,” Adrian said.

The stock of lower-rated bonds — ranked “BBB” — have quadrupled over the past decade, while the amount of more risky debt, known as “speculative grade,” has doubled, the IMF report said.

Investors could get spooked quickly if there is a sharper-than-expected economic slowdown, if central banks like the US Federal Reserve start raising rates again, or if there is a renewed flare up of trade tensions or a no-deal Brexit — which could push the British economy into recession and further slow growth in Europe, the report said.

Fabio Natalucci, Adrian’s deputy, said there are also “signs of deteriorating credit quality and a deterioration is underwriting standards.”

So while debtors likely could withstand a moderate slowdown of the economy “without substantial problems,” a more severe slowing or sharper rise in interest rates would create more stress because of the high debt levels, he said.

While governments have focused on shoring up oversight of banks to head off risky behavior, little attention has been paid to the corporate sector, Adrian said.

In China, “authorities face a difficult trade-off between supporting near-term growth, countering adverse external shocks and containing leverage through regulatory tightening,” the report said.

The IMF urged countries to take proactive steps, including limiting the amount of risky credit, boosting bank reserves and lowering government debt in the eurozone, while China should continue to crack down on “shadow banking” by non-bank lenders.

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