IMF tells regulators to brace for global 'liquidity shock'

[umbertino]

Financial engineering that preceded the last two financial crises is back, International Monetary Fund warns

 

 

By Ambrose Evans-Pritchard, in Washington

2:28PM BST 15 Apr 2015

 

 

The so-called 'flash crash' on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as "a powerful amplifier of financial stability risks."

 

http://www.telegraph.co.uk/finance/economics/11538509/IMF-tells-regulators-to-brace-for-global-liquidity-shock.html

 

An illusion of liquidity has beguiled financial markets across the world and spawned some of the worst excesses seen on Wall Street in modern times, the International Monetary has warned.

 

Investors are borrowing money to buy shares on the US stockmarket at a torrid pace and are resorting to the same sorts of financial engineering that preceded the last two financial crises.

 

"Margin debt as a percentage of market capitalisation remains higher than it was during the late-1990s stock market bubble. The increasing use of margin debt is occurring in an environment of declining liquidity," said the IMF in its Global Financial Stability Report.

 

"Lower market liquidity and higher market leverage in the US system increase the risk of minor shocks being propagated and amplified into sharp price corrections," it said.

 

The report said there are clear signs that underwriting standards are deteriorating in a pervasive search for yield. So-called "covenant-light loans" with poor protection for creditors now make up two-thirds of all new leveraged loans in the US.

 

 

The ratio of non-financial corporate debt to underlying assets has reached 27pc, even higher than it was just before the Lehman crash in 2008. Issuance of "second lien" loans that face a likely wipe-out in cases of default are running near record levels once again.

 

This is becoming hazardous as the US Federal Reserve prepares to raise rates, a move that risks a spike in global borrowing costs and may cause liquidity to dry up almost overnight. "A sudden shift in market views that unwinds compressed premiums and sends yields higher could trigger a market liquidity shock," said the report.

 

The so-called 'flash crash' on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as "a powerful amplifier of financial stability risks."

 

 

The risk of seizure has been made worse by new regulations that effectively force market makers and dealers to hold much lower inventories, or to drop out of the business altogether. The IMF said that large inflows of money into mutual funds have "provided an illusion of liquidity in credit markets" but this will be no protection in a major shock.

 

The report warned that distress in the global oil industry could be the trigger for the next storm. Lending to the oil and gas industry reached $450bn last year, double the pre-Lehman peak. New bond issuance graded at `junk' level have almost tripled to 45pc. The total debt outstanding is now $3 trillion.

 

Defaults in the energy sector tend to lag oil price crashes by around twelve months since drillers typically hedge their output on the futures markets for a while. "Aftershocks for the corporate sector may not yet have fully filtered through," said the IMF.

 

The slump oil prices is a powerful shot in the arm for world economy. It rotates vast sums of surplus capital from the oil-states into consumption, countering the chronic lack of demand that has held back global growth since 2008.

 

 

Yet there is a dark side for investors. The IMF said the oil states have accumulated $1.1 trillion over the last five years in foreign reserves alone, "an important source of funding for the global banking sector and capital markets."

 

These states hold $2 trillion in US assets, with $1.3 trillion concentrated in equities and $580bn in US Treasuries, and $230bn in credit. They are already having to draw down on this wealth to plug holes in their budgets at home, extracting a net $88bn last year. This could have "market repercussions" if it accelerates, said the report.

 

The IMF itself is in a delicate position. It is has been a cheer-leader for ultra-loose monetary policy to stave off global deflation and prevent debt-dynamics spinning out of control in Europe, Japan, and the US. Yet many of the risks now emerging are a direct result of quantitative easing and zero-rates.

 

 

A third of all sovereign bonds in the eurozone now carry negative yields. This is causing havoc for money markets and for the life insurance industry, which has locked into commitments stretching out for thirty years that are becoming untenable.

 

"A prolonged low interest rate environment will pose severe challenges for a number of financial institutions. Weak European midsized life insurers face a high and rising risk of distress. The failure of one or more midsize insurers could trigger an industry-wide loss of confidence," it said.

 

"The industry has a portfolio of €4.4 trillion in assets in the EU, with high and rising interconnectedness with the wider financial system. A large mark-to-market shock could force life insurers into asset reallocations and sales that could engulf the financial system," it said.

 

The IMF does love to keep us awake at night.

[new york kevin]

Surprise, surprise, surprise. See my response to the article on "Greece being close to the financial abyss." This will effect the US economy very negatively. Also it will be a great legacy for this current President, inheriting a bad economy in the US. Leaving the next Prez a U.S. economy and a world economy in far worse shape than the one he inherited.

[skeetdog]

Why are there two sets of rules...or maybe I'm not far enough up the food chain in finances to understand...If I  go out and barrow to the extent I'm over my head and think I can repay the loans and then fail to meet my obligations, it's my demise...My credit rating would drop to where I couldn't barrow the money for a Wally-World push mower...How is it that the same people that causes their own demise, which reflects on the populous, get bailed out of their ignorance in their profession. If your a truck driver and drive your truck off in the ditch, ya aint a good truck driver...Then if ya drive another truck off in the ditch and cause someone else pain...Ya aint gettin' another truck drivin' job...period...Why is it that the people allowed to deal in the money game that have proven that couldn't hit a Bull in the but with a base fiddle, are allowed to continue to lose more money on their assumption of what's a good deal...

[Barbara020548]

The present president inherited an economy far worst and made it better.   The present congress ® have much dislike for the middle class, govern only for the 1 per cent, and have demonstrated that a good America/American ship jobs overseas to make non-Americans life better.   However, these same  "good America/American" ship the product(s) to be sold to Americans with low paying jobs/no jobs has a demonstration of their true concern for the middle class.

[Markinsa]

The present president inherited an economy far worst and made it better.   The present congress ® have much dislike for the middle class, govern only for the 1 per cent, and have demonstrated that a good America/American ship jobs overseas to make non-Americans life better.   However, these same  "good America/American" ship the product(s) to be sold to Americans with low paying jobs/no jobs has a demonstration of their true concern for the middle class.

 

How is doubling the National Debt making our economy better?

 

.

[Nelg]

The present president inherited an economy far worst and made it better.   The present congress ® have much dislike for the middle class, govern only for the 1 per cent, and have demonstrated that a good America/American ship jobs overseas to make non-Americans life better.   However, these same  "good America/American" ship the product(s) to be sold to Americans with low paying jobs/no jobs has a demonstration of their true concern for the middle class.

I guess that's all a matter of perspective.  This present president has done nothing but make the economy worse than before.  His legacy will go down in history as the worst president ever.  Of course, that's JMO and from my perspective.  

 

But many of the things being discussed in the above material has nothing to do with those in office as it does with those in the power seats.  And this president does NOT have one of those seats.  He has tried to "grab" the power, but instead, what he has done if put the US economy further down the toilet.   

[Muleslayer]

The present president inherited an economy far worst and made it better. The present congress ® have much dislike for the middle class, govern only for the 1 per cent, and have demonstrated that a good America/American ship jobs overseas to make non-Americans life better. However, these same "good America/American" ship the product(s) to be sold to Americans with low paying jobs/no jobs has a demonstration of their true concern for the middle class.

I think you are on the the wrong forum!

I think you were looking for the kool aid forum!

Or maybe obamanoids international!

This way to the egress!

Edited April 16, 2015 by Muleslayer

[umbertino]

Umbertino's note : I don't know who edited ( adding whole article) my post. It doesn't say who did it... I understand it was done with best intention so in this sense it's appreciated but I'd like to let you know the reason that I do not post ( as it's been noticed in the last months or even 1 yr now) "Daily Telegraph" articles anymore in their entirety ( unlike "TheGuardian" articles which I still do) is simply because Mr Montana  informed  me  months ago that the Telegraph had complained about me reporting whole articles until then and they didn't want me to do that anymore... They said to him ( and he reported that to me) it's ok to post header , pics and link but evidently they want readers to go straight to site through link... I just wanted to  explain this thing

 

 This instead doesn't ( yet) apply to  the Guardian articles that I keep posting in their entirety

 

 

Again I do understand the whole adding of article  was done with good intention and I do appreciate it... Many are not aware of this DT issue

 

Ciao e Grazie

Edited April 16, 2015 by umbertino

[SgtFuryUSCZ]

***///

 

..."obamanoids international ".....

[TheHyperLinker]

The present president inherited an economy far worst and made it better.   The present congress ® have much dislike for the middle class, govern only for the 1 per cent, and have demonstrated that a good America/American ship jobs overseas to make non-Americans life better.   However, these same  "good America/American" ship the product(s) to be sold to Americans with low paying jobs/no jobs has a demonstration of their true concern for the middle class.

I was in a town today, near Lake Okeechobee that was mainly black populated and while most of the surrounding towns were paying $2.67/gal. for gas I couldn't find one gas station where the price was under $2.79/gal.. This seems to show me that the dragon of oppression also has a racial agenda and that dragon is NOT Obama. If he had done what he should have done with the Health insurance system here, and nationalised all health insurance companies, he wouldn't be here because of "special" interests.

 

Like Umbertino when I find good articles for here, I put links to the articles especially those that might get financially upset if I was to just copy & paste their articles, so for this one you are going to go there to learn what they are saying, even if they are just trying to push their subscriptions:

 

Exact Date Bible Says America Will Collapse

http://www.lombardifinancial.com/reports/EmpireOfDebt/index_04102015.php?dept=PC&sb=NMMAIN08[bP]&coffer=1&stitle=1

Edited May 7, 2015 by TheHyperLinker

[Nelg]

HyperLinker, the passage in Leviticus has nothing to do with prediction/prophecy or financial events; otherwise it would have been in operation since the year of first application. which would be in the time of Moses.  The Year of Jubilee is not unknown. In some parts of the world it is still practiced. Cessation from sowing and reaping is how things are to be done by the Hebrews (Israel) which provided the opportunity for special emphasis on teaching and training Israel in the Law (Deut. 31:10-13).  What did grow without cultivation was not to be harvested but left for the free us of all the people, especially the poor. 

But if one aspect of the Jubilee Years are to be observed, why not all the requirement?  

The plain fact is that this passage is used by the advertiser as a "gimmick" to get more subscribers.  It is clearly JUST an ad to get more people and has nothing to do with the rest of the AD.   

[italiancat]

Grazie, Umb !! EVERY politicion will make promises that they will NEVER keep. A new president won't and can't do NOTHING unless Congress and the Senate let's him. It was the same with Georgie and now with Obummer. No politician wants you to be on the same level as they are. When we understand this Fact, we will have seen "The Rest of The Story".