Sunday, September 23, 2018

BIS sees EM turbulence as symptom of broader malaise

      The turbulence that has engulfed emerging markets in recent months was hardly a surprise but rather a symptom of a broader malaise and a highly unbalanced global recovery from the 2007-2009 crises where persistently low interest rates helped boost economic activity but resulted in fragile financial markets and too much debt, according to the Bank for International Settlements (BIS).
     Although the assets of many emerging market economies were hit when the U.S. dollar began to rise in April, heightening risk aversion and resulting in a pullback by global investors, BIS still found that contagion was limited with no stampedes among portfolio managers.
     But further turbulence is likely given that financial markets in advanced economies are overstretched, financial conditions are too easy and debt, globally, is too high.
     "With interest rates still unusually low and central banks' balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health of care for him in case of a relapse," said Claudio Borio, head of BIS' Monetary and Economic Department.
      In its review, BIS also finds that international debt securities now outweigh bank loans as the main driver of international credit to firms, households and governments while the share of international credit issued in U.S. dollars has grown further since the global financial crises, in particular in emerging market economies.
      U.S dollar lending to non-bank emerging market residents has more than doubled since the financial crises to some $3.7 trillion, excluding borrowing through foreign currency swaps, as international credit to non-banks now amounts to 38 percent of global economic output.
    This increases the potential spillover from changes in U.S. monetary conditions, BIS adds.
     Click to read the BIS Quarterly Review.



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