Just as COVID-19 affects people with previous health problems more virulently, the economic crisis caused by the coronavirus pandemic has exposed and worsened the financial vulnerabilities that some countries have accumulated in the last decade of low interest rates.
This is the analysis that the International Monetary Fund (IMF) does in its latest report, published this Friday, on Global Financial Stability, in which it warns emerging countries to prepare and look for alternatives to the shortage of long-term financing and advises them to manage external pressures allowing the depreciation of their exchange rates, and only intervene if the situation becomes “disorderly”.
“In the event that the current economic contraction lasts longer or is deeper than expected, the tightening of financial conditions may be amplified by these vulnerabilities, causing more instability or even a financial crisis,” said the credit agency.
In its report, the IMF also warns of the risks posed by the crisis in the private credit markets, and among its weaknesses it mentions a lower credit quality in borrowers, more flexible contracting standards and liquidity risks in investment funds.
However, the IMF analysis underscores that banks’ exposure to these types of leveraged loans and high-yield bonds is now not as high as it was in the past, when the previous global financial crisis occurred.
And with respect to banking, it anticipates a reduction in its profits and profitability due to the conjuncture of low interest rates that it anticipates will continue in the long term.
“The accommodative monetary policy has been crucial in sustaining economic growth during this period … but extremely low interest rates have also compressed banks’ net profit margins,” says the IMF.
A simulation of the major banks in nine advanced economies shows that many of them “may be unable to generate profits above their cost of capital by 2025.”
One problem with low bank profitability, for the IMF, is that these institutions stop providing financing to households and businesses, “depriving the economy of much of the credit it requires.”
And another is that banks try to compensate by taking additional risks.
“Our analysis shows that, beyond the immediate challenges associated with the COVID-19 outbreak, a persistent period of low interest rates is likely to put more pressure on bank profitability in the coming years,” creating the danger. that banks try to “recoup profits by taking excessive risks,” the report said.
That “may sow the seeds of future problems,” said the agency, which encouraged regulators to “remain vigilant and avoid any accumulation of excessive risks that could reduce the resilience of the banking sector.”
The IMF recommended seeking a balance that protects the stability and soundness of financial institutions, while supporting economic activity, and was in favor of restricting dividend payments and share buybacks in companies.
On emerging markets, the IMF said that capital flight suffered since the start of the pandemic amounts to more than 100 billion dollars, almost twice (relative to GDP) than the amounts lost during the previous global financial crisis.
“While outflows have decreased since then, this dramatic change underscores the challenges in managing volatile portfolio flows and the risks that this entails for financial stability,” and reflects the increased risks that both borrowers and creditors took over the long term. cheap credit period there has been.