Transcript of the Press Conference on the Release of the April 2016 Global Financial Stability Report

April 13, 2016

Washington D.C.
April 13, 2016
Webcast of the press briefing Webcast

José Viñals - Financial Counsellor, Director of the Monetary and Capital Markets Department, IMF
Peter Dattels - Deputy Director, Monetary and Capital Markets Department, IMF
Matthew Jones - Assistant Director, Monetary and Capital Markets Department, IMF
Jennifer Elliott - Deputy Division Chief, Monetary and Capital Markets Department, IMF
Andreas Adriano - Senior Communications Officer, Communications Department, IMF

MR. ADRIANO: Good morning, everybody. Thank you for coming to this press conference to present the spring 2016 GFSR. With us today is Mr. Viñals, the Director of the Monetary and Capital Markets Department and Financial Counselor of the IMF. Peter Dattels is the Deputy Director of the department, and Matthew Jones and Jennifer Elliott are respectively Chief and Deputy Chief of the Global Analysis Division that produces the report. Mr. Viñals will have some opening remarks and then we will take your questions.

MR. VIÑALS: Thank you. Good morning to you all. It is a pleasure to see you back in Washington today when we are presenting the latest edition of our Global Financial Stability Report. Over the last six months risks to global financial stability have increased as a result of the following three developments.

First, macroeconomic risks are higher, reflecting a weaker and more uncertain economic outlook, regarding growth and inflation, and also more subdued sentiment. This was the subject of the WEO press conference yesterday.

Second, falling commodity prices and concerns about China's economy have put pressures on emerging markets and advanced economy credit markets.

And finally, confidence in policy traction has slipped amid concerns about the ability of overburdened monetary policies to offset the impact of higher economic and political risks.

Earlier in the year markets reacted negatively and very visibly to these developments. Global equities plummeted, volatility rose sharply, talk of recession in advanced economies increased, and bank equity prices were hit quite significantly. Today the situation in markets appears significantly better compared to the lows of mid-February. Equity markets have recovered a significant part of their losses. Oil prices are higher, while volatility has subsided. This improvement followed some better news on the economic front, as well as intensified policy actions by the European Central Bank (ECB) and the Bank of Japan, and a more cautious stance toward raising rate by the U.S. Federal Reserve. China also stepped up efforts to strengthen its policy framework to bolster growth and stabilize the exchange rate.

A key question that we address in this report is whether the turmoil we have seen over the past months is now safely behind us. Is it a one-off event, or is it a warning signal that more needs to be done? I believe it is the latter. More needs to be done to secure financial stability.

Much is at stake. Additional measures are needed to deliver a more balanced and potent policy mix. If not, market turmoil may recur and intensify and could create a pernicious feedback loop of fragile confidence, weaker growth, tighter financial conditions, and rising debt burdens. This could tip the global economy into economic and financial stagnation. In such a scenario we estimate that world output could fall by almost 4 percent relative to our baseline projections over the next five years. This would be roughly equivalent of forgoing one year of global growth.

So, what needs to be done? We need to go beyond the status quo. We need a collective approach to policy making to tackle a triad of global challenges. These are the same challenges which I described six months ago. Namely, crisis legacy issues which remain unaddressed in advanced economies, elevated vulnerabilities in emerging markets, and systemic market liquidity risks. The market turbulence that we saw earlier in the year is a powerful reminder of this unfinished business.

Let me discuss now the challenges affecting advanced economies and emerging markets, and what needs to be done to address them. Tackling these challenges, we estimate, will enable world output to expand by up to 1.7 percent relative to the baseline over the next five years. And this is like securing an additional half a year of global growth.

The first challenge to tackle is crisis legacies in advanced economies, particularly banks, as they play a key role in financing the economy. Now, a good thing is that banks are now considerably safer than in the past. Yet, it is also true that they came under significant market pressures at the start of the year as the economic outlook weakened and became more uncertain. But banks are not only challenged by the cyclical environment. They're also facing important structural challenges in adapting to the new post-crisis realities that continue to depress their profitability.

Many banks in advanced economies face significant business model challenges. And we estimate that these banks account for about 15 percent of bank assets in advanced economies. In the euro area, market pressures also highlight long-standing legacy issues. One of them is elevated nonperforming loans which urgently need to be tackled using a comprehensive strategy. Another legacy is excess banking capacity, namely too many banks, which will have to be addressed over time. Europe must also complete the banking union and establish a common deposit guarantee scheme, in addition to further advancing the development of a true capital markets union.

Let me turn now to the challenges affecting emerging markets. The sharp fall in commodity prices that we have seen has exacerbated both corporate and sovereign vulnerabilities, keeping economic and financial risks elevated. After years of growing indebtedness, emerging economies face a difficult combination of slower growth, tighter credit conditions, and more volatile capital flows. So far, emerging economies have shown remarkable resilience to this difficult environment, thanks to the judicious use of buffers accumulated during the boom years. This has been true in many emerging market economies. But it is also true that buffers are depleting quickly, with some countries running out of room for maneuver. As the health of the corporate sector in markets deteriorates, especially in commodity-exporting countries and in commodity-related sectors, refinancing pressures may become more acute. These can generate spillovers to the sovereign as many of the weaker corporates are also state-owned firms.

But corporates in emerging markets are also very important for banks, which provide the bulk of their financing. Bank buffers are generally adequate in many emerging markets, but may be tested by higher nonperforming loans. These interlinkages underscore the importance of close monitoring of corporate vulnerabilities, swift and transparent recognition and management of nonperforming assets, and strengthening the resilience of banks through adequate provisioning and capitalization.

Among emerging economies the most important one is China. China continues to navigate a complex transition to slower and more balanced pace of growth and a more market-based financial system. The Chinese authorities have advanced reforms, but the transition remains inherently complex. Here, the corporate bank nexus is also critical. Despite progress on economic rebalancing, corporate health in China is declining due to slow growth and low profitability. This is reflected in the rising share of debt held by firms, owed by firms that do not earn enough to cover their interest payments. This has increased to 14 percent of the debt of listed Chinese companies, more than tripling since 2010.

Increased strains in Chinese firms are important to Chinese banks. We estimate in the report that corporate bank loans potentially at risk in China amount to almost 1.3 trillion dollars. These loans could translate into potential bank losses of approximately 7 percent of GDP. Now, this number may seem large, but it is manageable given China's bank and policy buffers, and continuing strong growth in the economy. Equally important, the Chinese authorities are aware of these vulnerabilities, and are putting in place measures to deal with the over-indebted corporations, yet the magnitude of these vulnerabilities calls for an ambitious policy agenda, which addresses the corporate debt overhang, strengthens banks, and upgrades the supervisory framework to support an increasingly complex financial system.

To conclude, we need to work collectively to strengthen growth and financial stability beyond the current baseline. This is doable, but to do so policymakers need to deliver a more balanced and potent policy mix that goes beyond continuous over reliance on monetary policy. Monetary policy remains crucial. It still has ammunition, it is still effective, but cannot and should not remain the only game in town. Well-designed structural reforms and growth friendly and supportive fiscal policies are essential.

In addition, stronger financial policies that further enhance the resilience of the financial system must be put in place. At the global level, the financial regulatory reform agenda must also be completed and implemented, including for nonbanks. All these actions, which help bring balance to the policy mix, and together will make policies more potent and effective, this is what the world needs urgently to secure stronger growth and financial stability. Let me end here. My colleagues and I will be happy to answer any questions that you may have.

MR. ADRIANO: Thank you very much. Please identify yourself and try to keep your questions short, please.

QUESTIONER: Mr. Viñals, I was wondering if you could elaborate a bit on the discussion in the paper about negative interest rates. In there you say they are critical to getting growth going again in some major economies. The German finance minister has been critical of the ECB's negative rates saying that they are hurting German banks as well as German savers. I wonder if you could address some of these issues, and talk about the pros and cons for the banking sector of negative rates. Also, in the paper you do talk about a recurrence of volatility that could very much cause more problems and ultimately hurt growth. Just wondering what it is that might trigger that type of volatility again, if you could elaborate on that?

MR. VIÑALS: Thank you for the question. I will answer the second part first and then the first you asked.

On volatility, as I have mentioned, there are a number of unaddressed challenges and vulnerabilities that we have in both advanced economies and emerging markets. Things that could lead to higher volatility again could be related, for example, to a further weakening of growth prospects, which comes from policy inaction or policy missteps, may be associated with falls in commodity prices, which would make life much more difficult for both commodity-exporting countries and commodity-producing firms. As we have seen, this is something which also has a negative impact on the noncommodity part of the economy, because it is also very much affected.

You could have things going wrong in some relevant emerging markets, both from the economic or political front, and that brings me to the issue of the noneconomic risks. The risks which have to do with politics or with geopolitics, and which may play an important role in effecting global risk aversion and then leading to volatility. So, this is precisely why we need a more balanced and potent policy mix to buy insurance against higher volatility, which may take a toll on the real economy and on financial stability, and moving further up into the growth and financial stability that I mentioned. That is issue No. 1.

Issue No. 2, you asked about negative interest rates and their impact. Negative interest rates are the latest part, the latest addition to the unconventional monetary policy toolkit, and I think all of these unconventional measures are required once interest rates have hit the zero level. But we have discovered that we can go below. In my judgment, negative interest rates are useful for relaxing monetary and financial conditions, which should support aggregate demand and also price stability. So it is fully in line with the objectives of the central banks, which are deploying these policies. And, in that sense, they are no different from other unconventional monetary policy tools like quantitative easing. They serve the same end, and act through similar transmission challenges.

Now, it is true that there are limits to the use of negative interest rates in terms of for how long they can be low and how far down they can go, but overall negative rates are a net positive for the economy. It is true that monetary policy has distributional consequences, and you asked about banks and about savers. Let me talk about banks.

Negative interest rates affect banks through different channels, some more direct and some more indirect, but I think we need to take the overall view rather than the narrow view. The narrow view is that negative interest rates negatively affect bank profitability insofar as they cannot pass down to depositors cuts in deposit rates below zero. But, banks benefit from a lot of things which come from the monetary stimulus derived from both low negative interest rates and quantitative easing. They benefit in terms of better economic prospects, which contribute to better asset quality, lower nonperforming loans, lower provisions. All of this enhances bank profitability. It contributes also to banks making gains on the holdings of the assets that they hold, the securities that they hold, like bonds, long-term bonds, short-term bonds. So, all of this is something which is a positive for banks that also need to be taken into account.

So overall I think that these measures, including negative interest rates, although they have their limits, they are a net positive for the economy, and thus for banks. And also for citizens and for savers. The president of the Bundesbank said something yesterday which I think is very wise. People are not just savers. You are employed or unemployed. You hold financial assets. You hold property. You hold savings. You pay taxes. These measures of monetary stimulus, including negative interest rates, insofar as they contribute to better economic environment, benefit citizens beyond whether they are savers or not. There may be some distributional consequences from savers to debtors, but the gains are bigger than the losses and that is why this is something which is right as a social policy objective. This is why we think that negative interest rates are a net positive for the economy.

QUESTIONER: China may use the debt-to-equity swap to tackle its debt problem. Do you support this strategy, and is there any international experience you would like to share with the Chinese authorities to reduce the possible policy error?

MR. JONES: We think the plans announced are a welcome first step in tackling the high levels of corporate debt that we discuss in the report, but we think that debt-for-equity swaps can play a role, but they are not a comprehensive solution. We actually need a much broader, more comprehensive approach to tackle the high levels of corporate indebtedness in China.

I think the design is critical in terms of the debt that you convert. It must be from viable firms as part of their restructuring, perhaps including management change, and conducted at fair market value, and with banks holding the equity for a limited period of time, because banks really don't have the expertise to be able to be asset managers for the medium term. As I said, the easier part is a more comprehensive plan for addressing both impaired bank loans and high corporate debt. So you need to assess which firms are viable and restructure them, but you also need to practically encourage banks to manage and recognize their NPLs. And you also need a broader plan in terms of burden sharing among the banks and the corporates, and investors and the government.

So I think our experience with this sort of things is that they need to be part of a more comprehensive package. They are one policy tool that can be useful, but they are not going to be the only solution for tackling this large corporate debt overhang in China.

QUESTIONER: In the report you mention the potential shock effects from Brexit by Britain from the European Union. I want to ask a specific question around that issue. What do you think the impact of that will be on Britain's banking system, its insurance companies and the City of London in general, given the City of London's importance in the foreign exchange markets?

MR. VIÑALS: Thank you for the question. The first thing to say is that we are analyzing the potential consequences of different outcomes in the referendum that is being planned for June, and we will only be able to release those in the context of our Article IV in May. But having said that, let me also emphasize that the uncertainty which will follow a potential leave vote in the referendum is something that is going to be protracted, may last a couple of years, and that this is something which is going to create uncertainty not only for the economy, but in particular for the financial sector.

If at the end it turns out that Britain leaves the European Union, given that Britain and the British banks and other financial intermediaries are able to operate in the European Union by using the European passport, this is something which will be a significant change for a number of the financial institutions which operate at the European level based in London. That is a significant change.

Other potential consequences may be linked to what is the final shape of the relationships that Britain has with the European Union, if it were to exit. What is the steady state? And that is something where there are different possibilities envisaged.

But, I think that an exit of Britain from the European Union could be a negative shock to economically and financially to Britain, to the European Union, and that is something that would be negative for confidence, including confidence on the role of the city of London as a global financial hub.

QUESTIONER: Could you elaborate on the Italian banking situation? What is your opinion of the Italian Atlante fund, the private and voluntary backstop that the Italian financial system has just announced?

MR. VIÑALS: Thank you very much for the Italian banking question, which is a fixed point in all of these meetings. I think that the Italian banks have come a long way compared to a few years ago in terms of the actions that have been taken by the Italian authorities in putting in place the framework to increase the health and the resilience of the banks in Italy.

Italy has a large number of banking institutions of very different sizes, from very small, cooperative, popolari banks, to the largest international banks. So it is a very diversified banking system. But, one thing which is true is that in Italy the burden of nonperforming loans remains elevated and that actions are needed to deal with this burden. So, the recent initiative that was announced by the Italian authorities in the last few days, yesterday actually, regarding this Atlante fund, which has a name which is quite reminiscent of good things in the future. We welcome this as another step to move in the direction of cleaning up the nonperforming loans in the Italian banking system, and in addition as something that may help banks raise more easily the capital which is needed to move forward for those banks which need it. Insofar as this is a private sector solution, I think it is good that the private sector is engaged and we will have to give time to time and see how this is working.

But trying to engage the private sector in the solution to facilitate capital raising, and perhaps also trying to engage private interests in the purchase of some of the nonperforming assets of Italian banks, all of this must be part of a comprehensive strategy. So, there is work to be done in terms of consolidation in the Italian banking system, in terms of improving the governance of many institutions, so that the entities which result from the consolidation process are well-governed and managed, but things are moving in the right direction.

QUESTIONER: I would like to find out the impact of tight liquidity and high interest rates will have on Zambia’s private sector-led growth, and what policymakers should put in place to mitigate the impact.

MS. ELLIOTT: I think that, as Jose mentioned in his opening remarks, emerging market and developing economies are under pressure both from slowing growth and low commodity prices. Zambia, for example, is a commodity exporter and has been hit by those pressures. I think your question was really about private sector growth, and one of the things we have focused on in the GFSR is the importance of corporate indebtedness and monitoring the vulnerabilities involved in indebtedness so that the corporate sector cannot become a problem for the sovereign and can contribute to growth.

QUESTIONER: I just want to press a little bit more on Brexit. Could London continue to be the world's largest international financial market if Britain voted to leave the European Union?

MR. VIÑALS: I cannot give you an answer without knowing what the final shape of the arrangements would be between Britain and the European Union in the hypothesis that Britain were to leave the European Union.

QUESTIONER: Just want to know your assessment of the financial sector in India and how vulnerable it is to the shocks that you mentioned.

MR. VIÑALS: The banking sector in India has been subject to the attention of the authorities and even more so recently with the asset quality review that has been carried out by the Reserve Bank of India, which has identified a number of problem loans in bank balance sheets. Now, these loans are being recognized, they are being provisioned, and if needed the authorities should commit to have a recapitalization of the banks, particularly the public banks, which are most heavily in the business of having bad corporate loans. So, this is a work in progress. So I think that is the main vulnerability on the part of India internally— the corporate-bank nexus needs to be addressed properly through policies. The good thing is that India is addressing those.

And then, of course, India is subject to external risks or challenges, coming from the volatility of international capital flows. So, that is something also that calls for strong domestic macro and financial fundamentals to be able to counter potential headwinds coming from outside. Both internal and external challenges can be countered by the appropriate domestic policies.

QUESTIONER: Since the beginning of 2016 the new bail-in rules do apply in the eurozone, and there are a couple of countries like Portugal and Austria already experimenting. Can you give me an assessment of what you think of this first application? Austria is for example scrapping both bank debt and state guarantees. Is this a reasonable way to do it?

MR. DATTELS: The new resolution regime, the BRRD, is an important part of the architecture that has been put in place. The challenge that comes about is dealing with the legacy issues in terms of the overhang of NPLs in the banking system, so that the banks then can generate capital and resolve the issues. If we look at the Italian situation, we think that the systemic treatment still is important to resolve the issue. So it is important to have that in place, that enhances market discipline, and there is an orderly mechanism for resolution.

The question becomes when you have a number of additional banks that need to be resolved on a more systemic basis, and there we think that the flexibility within the BRRD may need to be exercised.

QUESTIONER: You highlighted the financial risks in China and it was very interesting to hear that. But this year the Chinese companies have been going on a spending spree, buying up assets here in the U.S. and elsewhere, and from what I understand the spending spree is being financed by Chinese SOE banks. Can you offer comments on this development?

MR. VIÑALS: I think that the fact that Chinese companies are becoming more international in the assets they buy is a normal development, which comes with the globalization of trade and finance in China.

China is becoming more integrated in the world and this is a natural development. Insofar as the companies which are buying these international assets are companies which have good business prospects, and these assets enhance their profitability, I think that this is something which is to be welcome, as if this was coming from any other country.

It is also true that in China there is a fraction of companies that are mostly linked to the old economy sectors, which have excess capacity and are suffering from the challenges coming from slower growth and having invested a lot in sectors which are not that profitable going forward, because their economic future is not bright. It is those companies which are mostly inside of China and are not having these international plans that are a worry, and these are the companies that we think that could be the source of problems in the future, in terms of potential bad loans and things like that.

But, internationalization of the activity of companies, it is a natural symptom of globalization.

QUESTIONER: I just want to question something that in the latest statement at the October meetings, the Managing Director said that members agreed to research in deep about the impact of regulations linked to the know-your-client and global operation institutions, reserves and capital requirements, especially in the United States, on the stop that really happens, banking operations, for emerging markets such as Mexico and Europe, and the requirement of global institutions for the American markets, and for avoiding the risk of high penalties that are imposed here, especially, and "de-banking" that it is producing or provoking in the trade commerce globally, and in the open economies such as Mexico.

MR. VIÑALS: This issue, which is properly known as de-risking by international banks, is something that concerns us very much here at the IMF. This is something that we are seeing. The most recent example we saw was one of the largest global banks pulling out of Africa, entirely. Not just of one country; not just one bank, but just pulling out of Africa entirely. This de-risking of international banks, reducing severely or cutting their correspondent banking relationships with emerging markets and developing economies, is something that creates significant problems also for the transfer of remittances. So we think that there are important consequences for the emerging markets and developing economies whose correspondent banking relationships are cut, in terms of financial inclusion. Many customers which were financially included may become financially excluded because they can no longer operate through banking channels.

Second, there may be consequences regarding financial stability insofar as there are a number of countries, especially small countries and jurisdictions, which only have a few relationships with international banks. If these relationships are cut, the stability of their financial systems may be impaired. And, also, this severing of relationships with international banks may also hurt the provision of trade financing, which is very important for many of these economies for economic growth.

So these are potentially very severe economic consequences. We are looking into that. At the IMF we are engaging with the Financial Stability Board and the World Bank in an international dialogue to come up with a solution to this problem, and there have been steps endorsed by the G-20 in this regard. But we are also taking this very seriously in our own work in terms of surveillance. Now, we pay a lot of attention to these de-risking issues. When we go to a particular country we try to assess the extent to which de-risking is macrocritical. We incorporate it when necessary in the discussions that we have in our Article IV. And we provide technical assistance to countries to help them overcome the problems that come from the inadequate application of the international standards relative to this. For instance, a number of banks fear the national application of the international standards regarding anti-money laundering or counterterrorism financing, for example, is not appropriate. So we work with countries to help them improve their compliance with international standards so that the possibility of de-risking is low in the future.

QUESTIONER: You mentioned having a more stabilized global financial system requires not to depend only on economic issues, but the political issues. Actually, you have seen the political tensions going around or taking place not only in the Middle East and around the world, and we have the refugee crisis and the terrorism incidents. How could the IMF deal with those tensions?

And I have a more focused question about Egypt. Actually, you can see the measures that have been taken since maybe two or three years, and the reforms that have been implemented by the government. How can you see the situation in Egypt, particularly after the revolution?

MR. VIÑALS: Let me answer the first question. Maybe I will turn to Ms. Elliott for the second, specifically on Egypt.

You are pointing toward risks of a noneconomic nature, but which may have profound consequences from the humanitarian point of view, the political point of view, and also for the economy. And I think one needs to take a holistic view of that.

In the case of the IMF, and that is your question, how do we take those issues into consideration? Because these risks are of a noneconomic nature, the solution must come from elsewhere. But what we are certain to do is look at these risks and how important they are for the economic well-being of countries, and then make sure that they are fully taken into account when we analyze global economic and financial developments, as we are doing today or we did yesterday with the WEO. And also, that they form part of the bilateral conversation that we have with countries’ authorities, and offer policy advice, how to best protect against these risks and how to best tackle the economic consequences of these risks. In some cases the IMF has also financial mechanisms to help countries cope with some of these important noneconomic risks, like pandemics. For instance, we provided financial support during the Ebola crisis in Africa. We have also facilities for countries which have gone through conflict in terms of post-conflict health. We offer policy advice, technical assistance, and financial facilities.

MS. ELLIOTT: Egypt, like all emerging markets, as Mr. Viñals has mentioned, is facing increased headwinds and is increasingly vulnerable, facing tighter financing conditions as well. So policy is going to be important, and resolving policy uncertainty of supreme importance.

In terms of your macro question, our Middle Eastern Department has a press conference on Friday. You may be able to go into greater detail then.

QUESTIONER: As you mentioned in your opening remarks, Mr. Viñals, the triad of risks that you discuss in the report are not new. You talked about them six months ago. You say the market mayhem in January shows there is unfinished business, but is there also a sense that time is running out to prevent this big slowdown?

Also, secondly, if I may, the pace of structural reforms is glacial at best. What is at the top of your wish list for countries to reform?

MR. VIÑALS: At the top of the wish list of what countries should do, this is something which is very country-specific, because “no one size fits all”. We are providing quite a bit of analysis in these meetings to offer recommendations to countries which are different, because their circumstances are also diverse. But having said that, something that I tried to emphasize very much in my presentation, and that would be the overarching theme of my wish list, is that we need a more balanced and potent policy approach. What is at stake is a lot. And, as I mentioned, we could, starting from the present baseline, either lose a full year of economic growth or gain half an additional year of economic growth at the global level. What is on the table is one and-a-half years of global growth, which is there for policymakers to win or for policymakers to forego. I think the world, where there is still so much unemployment, where economic growth is still poorer than we would like, cannot afford to forego this opportunity.

Now, one thing is very important. We are very much aware that not all the key rebalancing of policies can happen instantly, but committing to the rebalance and taking steps in this direction without delay is something that will help steer expectations in a favorable direction. And as we know, expectations are key for confidence, and what we saw in the first few weeks of the year was a crisis of confidence, a weakening in confidence. And what we need is to build confidence so that investment and consumption are stronger and that the economy gets going at a faster pace. Confidence is also critical for financial stability. So, a firm commitment to act and deliver, starting to deliver on this, with a well-planned calendar, is something that would be tremendously helpful regarding confidence.

One and a half years of global growth are at stake. Let's hope that policymakers don't miss the opportunity.

MR. ADRIANO: Thank you very much. We close this press conference. Please be back at 10:30 a.m. for the Fiscal Monitor presentation.


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