IMF fears turbulence in global markets
The International Monetary Fund (IMF) is closely monitoring recent
events in the world's emerging markets amid concerns that the withdrawal
of monetary stimulus by the US will add to the turmoil caused by the
sudden slump in Argentina.
The IMF believes that the next phase of the gradual removal of
stimulus to the US economy by the Federal Reserve could be the trigger
for fresh turbulence in countries seen as vulnerable to capital flight,
such as Turkey and Indonesia.
IMF Managing Director Christine Lagarde told the World Economic Forum
in Davos that the so-called tapering by the US Central Bank was a
"This is clearly a new risk on the horizon and it needs to be closely
watched," Lagarde said. "How tapering takes place, at what speed, how it
is communicated and what spillover effects it has, particularly in
Markets sold off after the Argentinian peso had its biggest one-day
fall since 2002. Chairman of BlackRock fund, Larry Fink, told the WEF
that one of his concerns was the large positions held by investors in
various emerging markets.
He said that tapering was not the main problem.
"It's going to require much better domestic policy in these emerging
markets," Fink said.
The governor of the Bank of England, Mark Carney said that stronger
banks and less indebted consumers meant the UK was now in better shape,
but listed an array of weaknesses that would inhibit the Bank raising
interest rates. He said UK banks might need to build up their defences
against further problems.
"As good as the numbers have been in the last three quarters, we're
talking about household-driven growth, where the economy is 20% below
its pre-crisis trend level, that has not yet rebalanced and is still
vulnerable to problems in its neighbour (the eurozone)."
Carney indicated that the UK would impose tougher rules on its banks
than those agreed internationally. "I do think home markets in several
cases, including the UK, need to supplement them as appropriate."
Meanwhile, the President of the European Central Bank, Mario Draghi,
said he was prepared to use all possible weapons to avoid the eurozone
sinking into Japanese-style deflation. Interest rates could be cut from
their already low level if necessary.
Draghi was speaking shortly after senior eurozone finance ministers
were forced to defend the plans intended to avoid eurozone banking
failures after Lord Turner, the former chairman of the Financial
Services Authority, raised concerns about their effectiveness.
Turner said that while a collapse of a large bank was less likely
than in the past, the eurozone needed to know how to handle a bank that
needs more capital after stress tests conducted this year.
"You have to put in public capital and that's the resolution fund.
The big danger for the eurozone over the next 10 years is that until
that fund is in place you run a risk," Turner said.
German Finance Minister Wolfgang Schäuble and his Dutch counterpart
Jereon Dijsselbloem, who is also President of the group of eurozone
Finance Ministers, insisted the European Stability Mechanism could be
used to bail out banks.
Following criticism that stress tests of banks in the past have not
been tough enough, Dijsselbloem said he hoped that problems were
"I hope it will unveil some unpleasantness, as that will give me a
good feeling that is being done properly," the Dutch Minister said.
Schäuble said that he had wanted the ESM - to be £55 billion in 10
years - to be bigger and kept up the pressure for structural reform in
the French and Italian economies after progress made by Spain, Ireland
Turner exposed differences with Schäuble by making references to the
way the US had tackled the banking system, forcing banks to take
bailouts if they could not raise money on their own.
"We are not the United States of America, we are not the United
States of Europe we are the European Union, quite complicated but rather
successful," Schauble said.
On a panel discussing what impact technological changes were having
on the workforce, a professor at Harvard, Larry Summers said, "We pay
people too much not to work and not enough to work."
Philip Jennings, who runs the UNI Global Union, praised the Bank of
England for using unemployment as a guide for the next rate rise. "It's
changed the narrative," he said.