Wednesday, October 7, 2015

IMF sees increased threat of financial crash; Deutsche Bank warns of large loss; Emerging market over-borrowing at $3trn

1 IMF sees increased threat of financial crash (Phillip Inman in The Guardian) The risk of a global financial crash has increased because a slowdown in China and decline in world trade are undermining the stability of highly indebted emerging economies, according to the International Monetary Fund.

The Washington-based lender of last resort said the scale of borrowing by emerging market countries, whose debts are vulnerable to rising interest rates in the US, mean policymakers need to act quickly to shore up the financial system.

José Viñals, the IMF’s financial counsellor, said the threat of instability and recession hanging over economies including China, Brazil, Turkey and Malaysia was one of a “triad of risks” that could knock 3% off global GDP. The second, he said, was the legacy of debt and disharmony in Europe, while the third is centred on battered global markets that are more likely to transmit shocks rather than cushion the blow.

Viñals said there was little reason to tighten monetary policy before Christmas while inflationary pressures and wage rises remain low. “The risks of a premature tightening are greater than those of waiting two or three more months,” he said.

The warning follows a summer of turmoil in global markets triggered by China’s attempt to increase its flagging exports with a currency devaluation. The move sparked panic in stock markets. Earlier this week, the IMF downgraded its forecast for global growth in 2015 to 3.1%, which would mark the weakest performance since the trough of the downturn in 2009.

The IMF is especially concerned that corporations and banks in some emerging economies continue to rely on massive debt financing to maintain growth, making them vulnerable to further falls in commodity prices and declines in trade.

2 Deutsche Bank warns of large loss (BBC) Deutsche Bank has warned investors it will post a net loss of €6.2bn for the third quarter. Higher capital requirements for its investment bank were partly responsible for the huge impairment charges of €5.8bn. There was also doubt about the value of its Postbank retail division that Deutsche plans to sell.

Germany's biggest bank also said the dividend for the year could be cut or scrapped. The group was also setting aside €1.2bn for legal costs. Deutsche is embroiled in the Libor-rigging scandal and is being investigated by Swiss authorities for suspected price-fixing on the precious metals market.

Analysts had expected a net profit of about €1bn for the third quarter before the unexpected announcement. New chief executive John Cryan, who took over in July, is preparing to cut about 23,000 jobs - about a quarter of the workforce - in a bid to reduce costs, it was reported last month. Deutsche Bank is due to publish its full third-quarter results on 29 October.

3 Emerging market over-borrowing at $3trn (San Francisco Chronicle) The biggest risks to the global economy are now in emerging markets, where private companies have racked up considerable debt amid a fifth straight year of slowing growth, the International Monetary Fund has said.

"We estimate that there is up to $3 trillion in over-borrowing in emerging markets," Jose Vinals, a top IMF official, said. He said that an unprecedented lending spree has come to an end with the plunge in prices for oil, minerals and other commodities that economists attribute to China's slowdown.

The risk is that shocks from bankruptcies in the developing world's private sector, particularly in heavily commodities-dependent Latin American economies, could be amplified in global financial markets. The worst-case scenario, said Vinals, is "a vicious cycle of fire sales and volatility."

Vinals said over-borrowing in China, where an August devaluation sent global markets reeling, amounts to nearly 25 percent of the Asian power's economic output and will need to be managed gingerly.

Seven years after the global recession, he said advanced economies still need to address remaining legacies of the crisis. For European banks, that means getting rid of some 900 billion euros worth of bad loans that Vinals called a continuing drag on the region's economy.

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