The IMF disclosed the Global Financial Stability Report this morning, with your friendly neighborhood economist present with a brand-new press badge (thanks to friends who helped facilitate the process) that arrived just an hour and a half before the meeting:)
Anyway, there is no way I could compete with the mighty FT with my one-person outfit, which sent an email update as the meeting was in progress, but where I could provide some value added is on the Turkey implications of the report:
First, the Fund notes that as credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey (my own metrics suggest there is not much pent-up demand right now), with the credit demand expected to increase as the economy recovers, the private sector is nevertheless likely to hit credit constraints hard in 2010 as well. The Fund recommends continued support from Central Banks to alleviate these constraints. In the Turkish context, with the private sector lending being crowded out by banks' appetite for Treasuries, an expected consequence of rollover rations of over 100%, it remains to be seen where the Central will start buying Treasuries to unclog credit markets directly, as direct rate cuts have so far had limited impact on market rates.
Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates, at least of history is any guide. This is risk for Turkish rates that is not discussed a lot. As Turkish Treasuries are more responsive to core market long-term rates than short-term rates, such a bear steepener would create an upward pressure on Turkish rates, forcing the Central Bank abandon its announced (but not believed) policy of on-hold policy, in effect changing the causality relationship between the benchmark and the policy rate.
As for the Turkey findings, the report notes that Turkey's largest risk is in external debt refinancing needs in 2010, with the bulk coming from corporate rollovers. However, Figure 1.19, contributions to changes in EM sovereign external spreads, should hang on the wall of all EM policymakers: The analysis shows that increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed since then, and it is safe to claim to a retraction of risk appetite is probably the single largest risk to EM assets at the moment.
Anyway, there is no way I could compete with the mighty FT with my one-person outfit, which sent an email update as the meeting was in progress, but where I could provide some value added is on the Turkey implications of the report:
First, the Fund notes that as credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey (my own metrics suggest there is not much pent-up demand right now), with the credit demand expected to increase as the economy recovers, the private sector is nevertheless likely to hit credit constraints hard in 2010 as well. The Fund recommends continued support from Central Banks to alleviate these constraints. In the Turkish context, with the private sector lending being crowded out by banks' appetite for Treasuries, an expected consequence of rollover rations of over 100%, it remains to be seen where the Central will start buying Treasuries to unclog credit markets directly, as direct rate cuts have so far had limited impact on market rates.
Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates, at least of history is any guide. This is risk for Turkish rates that is not discussed a lot. As Turkish Treasuries are more responsive to core market long-term rates than short-term rates, such a bear steepener would create an upward pressure on Turkish rates, forcing the Central Bank abandon its announced (but not believed) policy of on-hold policy, in effect changing the causality relationship between the benchmark and the policy rate.
As for the Turkey findings, the report notes that Turkey's largest risk is in external debt refinancing needs in 2010, with the bulk coming from corporate rollovers. However, Figure 1.19, contributions to changes in EM sovereign external spreads, should hang on the wall of all EM policymakers: The analysis shows that increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed since then, and it is safe to claim to a retraction of risk appetite is probably the single largest risk to EM assets at the moment.
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