June 18, 2018
U.S. Fiscal Stimulus Raising Risks to Global Economy: IMF
U.S. tax cuts and public-spending hikes are increasing risks to the global economy by boosting debt, potentially stoking inflation and pushing the dollar higher, the International Monetary Fund warned. Fiscal stimulus backed by the Trump administration and the Republican-controlled Congress will give a short-term boost to the U.S. and many of its trading partners, the IMF staff said in a statement Thursday on its annual checkup of the U.S. economy. However, adding fiscal measures at a time when the economy is growing “will elevate the risks to the U.S. and the global economy,” said the Washington-based fund. The loosening of the purse strings in Washington raises the risk of an “inflation surprise” for markets, the IMF warned, adding a rapid rise in price pressures would force the Federal Reserve to hike interest rates faster than expected. The IMF, which last week announced a record $50 billion loan program for Argentina, said it’s seeing signs that U.S. fiscal policy may be causing capital flight from emerging markets. The warning comes amid the strongest global upswing in seven years. While the fund sees global growth accelerating in 2018, it has predicted momentum will ebb in coming years as central banks raise rates and the effects of the U.S. fiscal stimulus fade. IMF Managing Director Christine Lagarde warned this week that clouds over the world economy are “getting darker by the day.” Her remarks followed a chaotic Group of Seven summit in which President Donald Trump revoked support for a joint statement disavowing protectionism. IMF sees the U.S. economy picking up in 2018 before slowing down in coming years. The near-term outlook for the U.S. economy is strong, the IMF said, noting that unemployment is near levels not seen since the 1960s. The U.S. is probably already past so-called full employment, but wages and prices are expected to increase at a “slow but steady” rate, it said.
Greek Debt Talks: the Main Relief Measures Being Considered
Greek bailout talks are reaching the final stretch and creditors are debating what relief measures they can offer Europe’s most-indebted state to ease its financial burden and facilitate its exit from the latest lifeline. Negotiations over the type, size and conditions of likely debt relief have been contentious, though all parties want to reach a final agreement by June 21, when euro-area finance ministers meet in Luxembourg. At stake is the country’s ability to meet its obligations over coming decades as well as whether markets perceive its debt as sustainable enough to invest in Greek securities again after the country’s bailout expires on Aug. 20. Euro-area finance ministers agreed last summer to consider an extension of up to 15 years on some of Greece’s loans from the European Financial Stability Facility — the predecessor to the euro area’s bailout fund. The extension would only apply to as much as 96.4 billion euros ($112 billion) in loans, and excludes those received bilaterally from euro-area countries and any outlays from the current program. While creditors such as the International Monetary Fund have been urging the maximum 15-year extension, Germany has been pushing for as little as three years, arguing that for now Greece doesn’t need more than that to make its debt sustainable. In the end, euro-area officials expect the number to be closer to the high single digits. Through its bond-buying securities and markets program (SMP) and the agreement on net financial assets (ANFA), the European Central Bank and euro-area central banks hold some 12.8 billion euros in Greek bonds, the profits from which are redistributed to euro-area governments. These profits from bond holdings, which will amount to around 4 billion euros until 2022, have been promised to Greece in order to help it ease its debt burden. This sum will likely be split into annual disbursements and used as a carrot creditors can offer Greece over the next few years in order to ensure the country sticks to its reform commitments and fiscal path.
Emerging Asia Hit by Biggest Foreign Investor Exodus Since 2008
A falling tide lowers all boats, it seems. Amid an exodus from emerging markets, investors are pulling out of even Asian economies with solid prospects for growth and debt financing. Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 — withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year, according to data compiled by Bloomberg. While emerging markets shone in the first quarter, suggesting resilience to Federal Reserve tightening, that image has shattered over the past two months. With American money market funds now offering yields around 2 percent — where 10-year Treasuries were just last September — and prospects for more Fed hikes, the bar for heading into riskier assets has been raised. Headlines on trade disputes that could hit Asian exporters haven’t helped. “It’s not a great set-up for emerging markets,” James Sullivan, head of Asia ex-Japan equities research at JPMorgan Chase & Co., told Bloomberg TV from Singapore. “We’ve still only priced in about two thirds of the U.S. rate increases we expect to see over the next 12 months. So the Fed is continuing to get more hawkish, but the market still hasn’t caught up.” While many emerging-market investors and analysts have praised Asian economic fundamentals, pointing to world-leading growth rates and political stability, some are starting to raise red flags as global liquidity starts to shrink. The Bloomberg JPMorgan Asia Dollar Index sank to a 2018 low on Monday, extending two weeks of declines after the Fed and European Central Bank both took steps toward policy normalization. Yet some still remain optimistic. Bank of America Merrill Lynch expects some of the regional currencies including the baht and the Philippine peso to appreciate slightly by the end of the year, a research note sent Monday showed. Six of 10 best-performing emerging currencies so far this year are in Asia, led by the ringgit’s 1.2 percent advance and the Chinese yuan’s 1.1 percent gain. Developing nations including Turkey, Indonesia, India and Argentina have raised rates, while Brazil’s central bank has sold extra foreign-exchange swap contracts in an effort to stabilize their markets.