Monday, October 12, 2015

More New Warnings on Systemic Risk from the IMF

The IMF just released a new Global Financial Stability Report (GFSR) that issues more new warnings for both emerging nations and advanced economies. The Sydney Morning Herald says that the report states that "emerging market have over-borrowed by an estimated $4 Trillion in the last decade" and "there are also risks to advanced economies where a messy withdrawal of stimulus measures could start a vicious cycle of fire sales, redemptions, and more volatility." 

Below are some quotes from the Sydney Morning Herald article. We can add this new IMF warning to our list of systemic risk warnings page.

"Governments and central banks risk sparking a fresh global financial crisis, the International Monetary Fund has said, as it called time on a corporate debt binge in the developing world.

Emerging market companies have over-borrowed by an estimated $US3 trillion ($4.2 trillion) in the last decade, threatening to trigger a sharp capital crunch and capital outflows in economies that have already been hit hard by low commodity prices, the fund warned on Wednesday in its latest Global Financial Stability Report.

And there are also risks to global stability from advanced economies, where a messy withdrawal of stimulus measures could start a "vicious cycle of fire sales, redemptions, and more volatility", according to the Fund. The US Federal Reserve has said it is on track to raise rates for the first time in almost a decade by the end of this year.

"The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity," the IMF concluded in its report.
The fund warned that there was no margin for error for policymakers navigating these hazardous risks."

My added comments:

The IMF is making it very clear that they oppose any raising of interest rates by the US Fed any time soon and they state in this report that "monetary policies in key advanced economies must remain accomodative and responsive." The US is of course a key advanced economy. 

This is a direct warning to the Fed to hold off on raising rates. My take on this report is that the IMF is saying to the Fed that if you raise rate and we get another major financial crisis as a result, it's on you and we warned you ahead of time.

Given all that we have followed here on this blog for nearly two years now, one has to wonder if the US Fed is being somewhat "setup" to take the fall if we do get another major crisis. Keep in mind Jim Rickards ongoing forecast about all this. He says that we will get another major crisis that the US Fed will not see coming. He says it will be too big for the US Fed to handle this time and that the IMF will step forward using a massive creation of new SDR's to deal with the crisis. 

The continual warnings from the IMF to the US Fed seem to support the idea that the IMF will be willing the blame the US Fed if another crisis unfolds. Would the IMF then use these warnings to promote the idea that they should handle the next crisis because they warned about the risk ahead of time and the US Fed ignored them?

Of course, if the Fed simply does not raise rates until after the 2016 US elections, they will be able to avoid a scenario where the IMF, World Bank, and BIS can blame them for causing a crisis. On the other hand, you have to wonder if this will destroy what credibility the US Fed has left after telling markets forever that an interest rate hike is coming soon if they don't do one. The Fed is in a very tough position that I don't know how they are going to escape if everything does not go well.

All we can do is follow events and see what actually does happen.

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