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IMF sees world economic risks increasing – western economies and banks display negative trends

IMF report today on the state of the global financial system and they note that risks have increased.  Of note is that the two bellweather economies, US and Japan are highlighted for political risk.  In days gone by, you expect that for the likes of Mexico, Argentine or Thailand.  How things have changed.

Global Financial Stability Report (GFSR) June update

Since the publication of the April 2011 Global Financial Stability Report (GFSR), financial risks
have risen for three reasons.

  1. First, while a multi-speed global recovery remains the base case, downside risks to this baseline have increased. 
  2. Second, concern about debt sustainability and support for adjustment efforts in Europe’s periphery is leading to market pressures and worries about potential contagion. Political risks are also raising questions about medium term fiscal adjustment in a few advanced countries, notably, the United States and Japan.
  3. Third, notwithstanding some recent pullback in risk appetite, the prolonged period of low interest rates may push investors into riskier assets in a “search for yield.” This trend has the potential to build financial imbalances for the future, particularly in some emerging markets.

In fact when they summarise the countries that are on either ’negative outlook’ or downgraded it is a very interesting picture populated completely by traditional western economies and no Asian economies except for Japan.

image

Next they refer to efforts to seek double digit returns in a low interest rate environment, and we see those words that should strike fear into everyone – ‘financial engineering’:  in other words attempts to create financial returns through other than commercial means.

As leveraged loan prices recover (after the deep discounts of 2008–2009) and yields fall,
investors are increasingly turning to financial engineering to achieve double-digit returns.
Both new and refinanced private equity transactions suggest that related corporate
balance sheets are quickly approaching pre crisis leverage multiples. Though the aggregate
amount of financial leverage provided remains far less than before the crisis, high-yield
corporate bond and leveraged loan investors have recently been borrowing at higher earnings
multiples, not much below 2007 levels.

Lastly looking at banks specifically, the picture remains uneven across American and European banks with some real trouble spots in the event of any new type of banking crisis. Portugal, Germany and Ireland stand out as laggards.

image

All in all not a pretty picture.

Written by Colin Henderson

June 17, 2011 at 10:08

Posted in Uncategorized

3 Responses

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  1. […] This from June 17th, 2011 based on an IMF report indicating political risk in the US,  seemed to many as an irrelevant comment at the time.  No more, and note the reference to political risk in the S&P report.  All the talk of the $2 trillion mistake is missing the point.  […]

  2. […] This from June 17th, 2011 based on an IMF report indicating political risk in the US,  seemed to many as an irrelevant comment at the time.  No more, and note the reference to political risk in the S&P report.  All the talk of the $2 trillion mistake is missing the point.  […]


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