More than two years ago, seeking to revive a moribund economy, the European Central Bank (ECB) embarked on a new monetary policy measure: charging interest on excess liquidity that banks held at the central bank. The move complemented a series of other easing measures aimed at bringing inflation back to the ECB’s price stability objective of below, but close to, two percent over the medium term. (more…)
We support the introduction of negative policy rates by some central banks given the significant risks we see to the outlook for growth and inflation. Such bold policy action is unprecedented, and its effects over time will vary among countries. There have been negative real rates in a number of countries over time; it is negative nominal rates that are new. Our analysis takes a broad view of recent events to examine what is new, country experiences so far, the effectiveness of negative nominal rates as well as their limits and their unintended consequences. Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. Still, there are limits on how far and for how long negative policy rates can go. (more…)
By José Viñals
Today global financial stability is not yet assured and downside risks prevail. Our recommendation is for an urgent upgrade in policies, to avoid downside risks and to achieve our upside scenario of “successful normalization” of monetary and financial conditions. This will secure financial stability and strengthen the economic recovery.
Problem loans are clogging the arteries of Europe’s banking system. The global financial crisis and subsequent recession have left businesses and households in many countries with debts that they cannot repay. Nonperforming loans as a share of total loans in the EU have more than doubled since 2009, reaching €1 trillion—over 9 percent of the region’s GDP—by end-2014. These loans are particularly high in the southern part of the euro area, as well as in several Eastern and Southeastern European countries. Only a handful of countries have managed to lower their nonperforming loan ratio to below its post-crisis peak.
Global financial markets traditionally take their cue from the United States. Unexpected Fed rate hikes have unsettled global markets in the past. The entire global financial system threw a tantrum when then Fed Chairman Ben Bernanke merely suggested in May 2013 that the end to bond-buying and other policies could soon begin. However for the past year, the gears of global markets seem to have been thrown into reverse — it is German government bonds, known as Bunds, rather than U.S. bonds, known as Treasuries, that appear to be driving prices in global bond markets. This role reversal could add a new layer of complexity to investor calculations as they prepare for the beginning of Fed interest rate hikes, which are expected later in 2015. Also, as developments in Greece lead to rises and falls in Bund and Treasury yields, this is a trend worth keeping an eye on.
A year ago our research showed Europe had an €800 billion stock of bad loans. In our latest Global Financial Stability Report we show that the problem has now grown to more than €900 billion. This stock of nonperforming loans is concentrated in the hardest hit economies, with two-thirds located in just six euro area economies. The European Central Bank’s Asset Quality Review confirmed this picture, which revealed that the majority of banks in many of these economies had high levels of nonperforming assets (see chart 1).
Since mid-2014, diversity and divergence—applying to countries’ economic situations, policies and performance—have dominated global economic discussions. Differing economic performance in major advanced countries has led to divergent monetary policies.
Both the Bank of Japan and the European Central Bank have started significant expansions of their balance sheets, while the U.S. Federal Reserve has ended its bond-buying program and is expected to start raising rates. This has had many effects, in particular, contributing to a sharp depreciation of the Yen and the Euro against the U.S. dollar (see chart 1).
By José Viñals
The three main messages from this Global Financial Stability Report are:
- Risks to the global financial system have risen since October and have rotated to parts of the financial system where they are harder to assess and harder to address.
- Advanced economies need to enhance the traction of monetary policies to achieve their goals, while managing undesirable financial side effects of low interest rates.
- To withstand the global crosscurrents of lower oil prices, rising U.S. policy rates, and a stronger dollar, emerging markets must increase the resilience of their financial systems by addressing domestic vulnerabilities.
Let me now discuss these findings in detail.
Six years after the global financial crisis, Europe continues to be weighed down by high levels of corporate debt and millions of nonperforming loans. Small and medium-sized enterprises (SMEs) bear a disproportionately heavy burden. Their nonperforming loan ratios are on average more than double those of their larger corporate cousins. This is worrisome. SMEs are the lifeblood of the European economy, comprising 99 percent of all businesses and employing nearly two of every three workers in Europe. Given the importance of smaller businesses to the economy, addressing their problem loans could lay the foundation for a more robust and sustainable economic recovery.
The last five years have been a reminder of the importance of interconnections and risks in the global economy. They have triggered intense discussions on the optimal way to combine fiscal, monetary, and financial policies to deal with spillovers, and on the need and the scope for coordination of such policies.
The IMF’s 15th Jacques Polak Annual Research Conference, which took place in Washington DC on November 13 and 14, 2014, focused on Cross-Border Spillovers, and took stock of what we know and do not know. The summary below picks and chooses some papers, and does not do justice to the full set of papers presented and discussed at the conference. They can all be downloaded, and videos of each session are available, at www.imf.org/external/np/res/seminars/2014/arc.