lunes, 28 de agosto de 2017

lunes, agosto 28, 2017

Fear of finance

Financial stability is a growing concern of central Banks


China’s central bank has more cause to worry than the Fed or the ECB
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CENTRAL bankers have gathered at their annual shindig in Jackson Hole, Wyoming, for the past ten years with only one thing on their minds: the health of the global economy. This year’s gathering is different. The bankers’ preoccupations are changing, from recovery to financial stability.
 
Oddly, rising concern about the risks of financial excess is good news. It reflects the arrival of the first synchronised global economic upswing since 2010. GDP growth in the quarter ending in June was the most rapid since then, according to JPMorgan Chase, thanks to stronger-than-expected activity in China, Japan and Europe (Britain was a notable exception). Any relief, however, is mixed with anxiety that the excesses which led to the crisis of 2007-08 are again pervasive.
Policymakers have helped support the economy over the past decade. But by keeping interest rates low, they have also spurred investors to take extra risks in search of larger returns. The American stockmarket is on a cyclically adjusted price-earnings ratio of 30—a level surpassed only in 1929 and the late 1990s. Investors are rushing to buy government debt from risky countries. Argentina has defaulted on its debts six times in the past century, but still easily found buyers for a 100-year bond in June. Earlier this month buyers snapped up Iraq’s first independent bond issue for more than a decade.
 
The tension between growth and stability is most obvious in China. The IMF this month simultaneously raised its growth forecasts and warned that the country was gorging itself on debt, which jumped from 150% of GDP in 2007 to 280% in 2016. Since the start of this year, the People’s Bank of China has restricted the supply of short-term liquidity to banks.
 
Regulators have also ordered them to account for loans hidden off their balance-sheets. So far, so good: funding costs have risen and overall credit growth has slowed even as nominal growth has rebounded. But the economy has recently started to lose momentum. Will China continue efforts to constrain credit even when growth dips below official targets? The fear is that it will revert to type and let credit surge again.
 
Concerns about financial fragility are of a very different kind in Europe, where a recovery is gaining strength. Since December, when the European Central Bank lowered its target for asset purchases, to €60bn ($70bn) a month, there has been speculation that the ECB’s programme of quantitative easing (QE, the creation of money to buy assets) must wind down soon. But the bank is nervous about a repeat of the “taper tantrum” of 2013, when markets were spooked by signals from the Fed that it would be stopping QE. A hurried withdrawal of QE might cause a sudden rise in bond yields as bubbly assets are repriced. That could hurt countries, such as Italy, with big public-debt burdens.
 
The Federal Reserve sits somewhere between China and Europe. The American economy has been expanding for years; only twice in its history has it grown for more consecutive quarters.
 
Its financial system looks robust. But here, too, queasiness about share prices and the lengths to which investors will go to buy bonds with decent yields has crept into the Fed’s deliberations.
 
As the crisis of 2007-08 fades from memory, the Fed is worrying about the efforts of the Trump administration to loosen the shackles that bind the banks. Stanley Fischer, its vice-chairman, has opposed proposals from the Treasury that “stress tests” of big banks should be softer.
 
Alarm bells
 
It is right that central banks should be vigilant about threats to financial stability. But the Fed should not yet put concerns about risk-taking above the immediate demands of the economy.
 
American banks are well-capitalised; and there is a decent case for simplifying some post-crisis regulations, particularly those that bind America’s smaller lenders. As for the euro zone, its recovery is still recent and continues to need support; the ECB should not be withdrawing stimulus abruptly in any case. For China the real test lies ahead, perhaps as early as next year.
 
Tensions between growth and stability will become more acute as time goes on. But as the central bankers descend on Wyoming, it is too soon for them to stop worrying about the health of the world economy.

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