IMF warns on emerging markets corporate debt
With monetary easing by major central banks pushing liquidity into emerging markets, policymakers need to watch out for bubbles, the IMF says
Policymakers need to address some new risks stemming from the easy monetary policies that have been put in place all over the world to fight the consequences of the financial crisis, José Viñals, financial counsellor and director of the International Monetary Fund's Monetary and Capital Markets Department, said in a news conference.
The easy monetary policies have been "essential" to support the economies but, if they are used over a long time, they could create "excessive risk-taking and asset bubbles," Viñals said.
"Borrowing in international markets by corporates in emerging markets has been growing at a rapid pace, exposing them to currency risk and leverage," he said.
"Emerging markets need to keep their guard up against deteriorating bank asset quality and disruptive capital flows," Viñals added.
"They should prevent the build-up of excessive leverage and the build-up of asset price bubbles."
But he did not encourage the use of capital controls, a measure preferred by many policymakers in emerging countries, saying that flexible exchange rates, the level of foreign exchange reserves, adjustments in the monetary and fiscal stances and macroprudential policies could be used instead, to counteract the negative effects of capital flows.
"Let's also remember that capital flows bring benefits," Viñals said. "Admittedly sometimes if there is too much capital coming too quickly it may pose problems in terms of overheating."
The IMF, which before the crisis regarded capital controls as anathema, has changed its position since, and now believes that if they are targeted and temporary, capital controls could be used to ensure financial stability.
Asked whether there were signs of a bubble forming in Latin American assets, Robert Sheehy, from the IMF's Monetary and Capital Markets Department, said: "there are some hot spots, but we don't see any generalized bubble or signs of overheating."
US CORPORATE DEBT
Another area of concern for the IMF because of the monetary easing that has taken place in developed economies is that of US corporate debt, where a "very rapid increase" in issuance of debt by high-yield companies has taken place.
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"In the US, corporate debt underwriting standards are weakening rapidly. Continuing low interest rates in the US are leading some pension funds to seek continued risk," Viñals said.
But he did not advocate a withdrawal of liquidity or a reversal of quantitative easing policies carried out by the major central banks.
"When the patient is still under treatment you should not suspend the medicine but you should always be vigilant about the side effects," he said.
"Lifting interest rates and exiting this policy now would be extremely detrimental not only for the economies but also for financial stability."
Viñals believes the most important thing is to make progress in the euro area, "which still needs to be fixed."
With credit still not flowing into the real economy, especially in peripheral countries, companies face a "debt overhang" that had built up before the crisis; the reduction of this debt poses challenges, according to the IMF.
A study by the IMF showed that corporate debt would need to be reduced in the eurozone periphery by about 20%, "but this is something that can be done over time," Viñals said.
Policies to stop fragmentation of the eurozone and allow banks in the periphery to fund themselves in better conditions would help, as the banks would then pass these cost savings on to companies, which could refinance in more advantageous conditions, he added.
The companies in their turn would need to take some measures such as reducing dividends and perhaps selling some non-core assets to cut costs and become more efficient, he said.
Moving decisively towards a full-fledged banking union in the eurozone a process that is still delayed by disagreements over the mutualisation of debt as well as improving the flow of credit towards small and medium-size companies are part of reforms needed for the single currency area, which would ensure the world economy can recover sustainably."A key action needed is to fix the euro area, to fix it once and for all," Viñals said.
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