Arab Today, arab today imf warns of market breakdown potential due to low rates
Last Updated : GMT 05:49:56
Arab Today, arab today
Arab Today, arab today

IMF warns of market breakdown potential due to low rates

Arab Today, arab today

Arab Today, arab today IMF warns of market breakdown potential due to low rates

US dollar
Washington - AFP

Financial markets face a higher risk of liquidity squeezes in a sell-off due to the effects of the long period of low interest rates, the International Monetary Fund said Tuesday.

In a semi-annual report on global financial stability, the IMF said that markets for trading equities, bonds, currencies and other instruments generally appear liquid at the moment.

But that liquidity -- the ability of traders to easily buy or sell a large volume of an asset -- could be more "prone to evaporate" in the current environment, causing more volatility and undermining financial stability.

"Central banks and financial supervisors need to be prepared for episodes of liquidity breakdowns," said IMF economist Gaston Gelos, one of the authors of the new report.

"The level of liquidity in financial markets... has not shown a marked decline in most asset classes; however, low interest rates may be masking an erosion of its underlying resilience," the report said.

It said that the low interest rates at the hands of the world's leading central banks in the United States, Europe and Japan have encouraged more risk taking.

At the same time, the central banks' quantitative easing stimulus programs have bolstered liquidity, especially in bond markets.

But other changes in market structure have heightened the risks: the investor base has become less diverse; high-frequency and computer-based trading has become more powerful; there has been a rise in small bond issues; and many banks have pulled back from actively trading in financial markets, in part due to post-financial crisis regulations.

Because of that, the IMF said, once interest rates rise, market liquidity will probably decline and could do so to an unnerving degree.

"In extreme conditions, a sharp drop in liquidity can threaten financial stability since several asset markets, for example, bond and repo markets can freeze altogether -- as seen in the global financial crisis," it said.

It noted that in that crisis in 2008, a liquidity shock in one market caused a chain reaction in other markets that led to a shock in the entire financial system.

Part of the problem, too, is that the low rates have encouraged many more companies across emerging markets to borrow funds offshore, especially via bond issues.

Borrowing by firms has quadrupled in the past decade, the IMF pointed out, with a surge tied to the ultra-low rate stance of the US Federal Reserve since 2008.

But the report asked whether borrowers, most importantly those in emerging markets, have prepared themselves for higher interest rates, and for falls in their home currencies.

"These developments make emerging-market economies more vulnerable to a rise in interest rates, dollar appreciation, and an increase in global risk aversion," said Gelos.

The report warned that emerging- market governments should prepare themselves for more corporate distress and failures, and should reform rules to make it easier to resolve corporate insolvencies.

arabstoday
arabstoday

Name *

E-mail *

Comment Title*

Comment *

: Characters Left

Mandatory *

Terms of use

Publishing Terms: Not to offend the author, or to persons or sanctities or attacking religions or divine self. And stay away from sectarian and racial incitement and insults.

I agree with the Terms of Use

Security Code*

Arab Today, arab today imf warns of market breakdown potential due to low rates Arab Today, arab today imf warns of market breakdown potential due to low rates

 



Arab Today, arab today

Name *

E-mail *

Comment Title*

Comment *

: Characters Left

Mandatory *

Terms of use

Publishing Terms: Not to offend the author, or to persons or sanctities or attacking religions or divine self. And stay away from sectarian and racial incitement and insults.

I agree with the Terms of Use

Security Code*

Arab Today, arab today imf warns of market breakdown potential due to low rates Arab Today, arab today imf warns of market breakdown potential due to low rates

 



Arab Today, arab today France defies terrorism through tourism

GMT 15:18 2017 Saturday ,20 May

France defies terrorism through tourism
Arab Today, arab today Zainab Fadel Oglu designs “Shakerin” mosque

GMT 12:13 2017 Thursday ,11 May

Zainab Fadel Oglu designs “Shakerin” mosque
Arab Today, arab today Seeks to move past rift with Israel

GMT 08:00 2017 Monday ,08 May

Seeks to move past rift with Israel
View News in Arabic - Business: اقتصاد دولي
Arab Today, arab today
Arab Today, arab today
Arab Today, arab today Mozambique's gas boom dream under threat

GMT 16:29 2017 Monday ,08 May

Mozambique's gas boom dream under threat
Arab Today, arab today Prepares to give stargazers an eyeful

GMT 13:38 2017 Monday ,06 March

Prepares to give stargazers an eyeful
Arab Today, arab today Jaguar displays XF Sportbrake line

GMT 14:36 2017 Monday ,08 May

Jaguar displays XF Sportbrake line
Arab Today, arab today BMW sees forecasts in reach

GMT 09:04 2017 Thursday ,04 May

BMW sees forecasts in reach
Arab Today, arab today Climate science: Bad news gets worse

GMT 08:48 2017 Saturday ,06 May

Climate science: Bad news gets worse
Arab Today, arab today
Arab Today, arab today
 
 Arab Today Facebook,arab today facebook  Arab Today Twitter,arab today twitter Arab Today Rss,arab today rss  Arab Today Youtube,arab today youtube  Arab Today Youtube,arab today youtube
arabstoday arabstoday arabstoday arabstoday
arabstoday arabstoday arabstoday
arabstoday
بناية النخيل - رأس النبع _ خلف السفارة الفرنسية _بيروت - لبنان
arabstoday, Arabstoday, Arabstoday