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Transcript of April 2020 Global Financial Stability Report Press Briefing

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Via IMF (Den Internationale Valutafond)

Transcript of April 2020 Global Financial Stability Report Press Briefing

April 14, 2020



Tobias Adrian, Director, Monetary and Capital Markets Department

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department

Randa Elnagar, Senior Communications Officer, Communications Department


MS. ELNAGAR: Good morning, everyone, and welcome to the Global Financial
Stability Report Press Briefing. I’m Randa Elnagar of the IMF
Communications Department. We have with us here, Tobias Adrian, a financial
counselor and Director of the Monetary and Capital Markets Department. We
also have with us, Fabio Natalucci, Deputy Director of the Monetary and
Capital Markets Department. Tobias is going to give us some opening
remarks, and then we’re going to start getting your questions. Thank you.

MR. ADRIAN: Good morning, ladies and gentlemen. Today, we are pleased to
present the latest edition of the Global Financial Stability Report. Let me
show you a new app, that we released today, which features all four of the
IMF’s flagship products. So, you can download this app, and download the
flagships, on your iPad.

Along with the first chapter of the report, which was released today, you
will be interested in further chapters, which will be released in coming
weeks. The COVID-19 pandemic has created an unprecedented human and health
crisis. The measures necessary to contain the virus have triggered an
economic downturn. At this point, there is great uncertainty about its
severity, and length. This new edition of the report shows that the
financial system has already been dramatically impacted. The further
intensification of the crisis could threaten global, financial stability.

Since the pandemic’s outbreak, prices of risk assets have fallen sharply.
At the worst point of the recent sell off, risk assets suffered half, or
more, of the declines that they experienced in the global, financial crisis
of 2008.

For example, many equity markets, in economies large and small, endured
declines of 30 percent, or more, at the through. Credit spreads jumped,
especially for lower-rated firms. Signs of stress also emerged in major
short-term funding markets, particularly the global market for U.S.
Dollars. Volatility spiked to levels last seen during the global, financial
crisis, amid the uncertainty about the economic impact of the pandemic.

With the spike in volatility, market liquidity also deteriorated
significantly. Including, in markets traditionally seen as deep, like the
U.S. Treasury Market. That has contributed to abrupt, and surprise moves.

To preserve the stability of the global, financial system, and support the
global economy, central banks worldwide have been the first line of
defense. They have taken actions in four broad areas.

First, they have significantly eased monetary policy, by cutting policy
rates. In the case of advance economies, to historic lows. Nearly half of
the central banks, in emerging market economies, have also cut policy
rates. The effects of rate cuts will be reinforced through central bank
guidance, about future path of monetary policy. And, through expanded,
asset purchase programs.

Second, central banks have provided additional liquidity to the financial
system, including through open-market operations.

Third, a number of central banks have agreed to enhance the provision of
U.S. dollar liquidity, through swap lines.

Fourth, and finally, the central banks have reactivated programs, used
during the global, financial crisis. And, they have launched a range of
broad-based, new programs, including the purchase of risky assets, such as
copper bonds.

By effectively stepping in as buyers of last resort, in these markets, and
by helping to maintain upward pressures on the cost of credit, central
banks are ensuring that households, and firms have access to credit, at an
affordable price.

To date, central banks have announced plans to expand the balance sheets,
including through loans, and as purchasers, by over six trillion U.S.
dollars. They have also expressed readiness to do more, if conditions

As a result of these actions, investor sentiment has stabilized in recent
weeks. Strains in some markets have abated, somewhat. And, risk assets
prices have recovered a portion of their earlier declines. Sentiment
continues to be fragile, however. Global, financial conditions remain much
tighter, compared to the beginning of the year.

All in all, the sharp tightening of global financial conditions, since the
COVID-19 outbreak, together with the dramatic deterioration in the economic
outlook, has shifted the one year ahead distribution of global growth,
massively downward.

This points to a significant increase in downside risks to growth, and
financial stability. There is now a 5 percent likelihood, an event that
happens every 20 years, that global growth will fall below 7.4 percent. By
comparison, this threshold was above 2.6 percent, in October 2019. A
10-percentage drop in downside risks.

So often, as it happens in times of financial stress, emerging markets have
borne the heaviest burden. In fact, emerging markets have experienced the
sharpest portfolio flow reversal on record. About 100 billion, or 0.4
percent of the GDP, posing stark challenges to more vulnerable countries.

The global spread of COVID-19 may require the imposition of tougher, and
longer-lasting containment measures. Actions that may lead to further
tightening of global financial conditions, should they result in a more
severe, and prolonged downturn.

Such a tightening may, in turn, expose financial vulnerabilities that have
intensified in recent years, in the environment of extremely low interest
rates. This could further exacerbate the COVID-19 shock.

For example, asset managers are facing large outflows, and could be forced
to sell into falling markets. That’s intensifying downward price movements.
In addition, levered investors may force further margined calls. And may be
forced to unwind their portfolios. Such financially levering may aggravate
selling pressures.

As firms become distressed, and default rates climb higher, credit markets
may come to a sudden stop. Especially in riskier segments like high-yield,
leverage loan, and private debt markets. These markets have expanded
rapidly, since the global, financial crisis, reaching 9 trillion dollars
globally. At the same time, borrowers’ credit quality, underwriting
standards, and investment protections have weakened.

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Since early March, high-yield spreads have skyrocketed. Particularly, in
the sectors most affected by the pandemic, like air travel and energy.
Similarly, leveraged loan prices have fallen sharply. Reaching about half
the drop that was seen during the global, financial crisis, at one point.

As a result, ratings agencies have revised upward, their speculative-grade,
default forecast, to recessionary levels. Market implied defaults have also
risen sharply. Banks are in the better position today, than they were at
the onset of the global, financial crisis.

Banks have more capital, and liquidity than in the past. They have been
subject to stress tests, and greater supervisory scrutiny in recent years.
In addition, the substantial, and coordinated action, by central banks, to
provide liquidity to banks, in many economies, should also help alleviate
potential, liquidity strains.

Nonetheless, the resilience of banks may be tested in the face of a sharp
slowdown in economic activity. Which may in turn, be more severe and
prolonged than currently anticipated.

Indeed, large declines in bank equity prices, since mid-January suggests
that investors are concerned about profitability, and prospects for the
banking sector. For example, matters of bank capitalization, based on
market prices, are now worse than during the financial crisis, in some
countries. The concern is that banks, and other financial intermediaries,
may act as an amplifier, should the crisis deepen further.

Looking ahead, central banks will remain crucial to safeguarding the
global, financial stability, and maintaining the flow of credit to the
economy. But this crisis is not simply about liquidity. It is primarily
about solvency. At a time, when large segments of the global economy have
come to a complete stop. As a result, fiscal policy has a vital role to

Together, monetary, fiscal, and financial policies should aim to cushion
the impact of the COVID-19 shock. And to ensure a steady, sustainable
recovery, once the pandemic is under control. Close, continuous,
international coordination will be essential to support vulnerable
countries, to restore market confidence, and to contain financial stability

The IMF is ready to assert the full weight of its resources, to help
protect the world’s most vulnerable economies, and to strengthen the
eventual recovery.

Now, I would be pleased to take more questions.

MS. ELNAGAR: Thank you, Tobias. We’re going to start with this question. It
seems a big risk to the global financial system now, would be a spike in
interest rates. I know this is not the forecast, but suppose inflation is
not so quiet, what does that mean for financial markets? Should the Fed
guard against this with yield curve control? Thank you.

MR. ADRIAN: Yeah, thanks for the question. Indeed, when you look at yield
curves in countries such as the U.S., Germany, or Japan, yields are very
low, and they are very low at the long end of the curve as well. So there
has been a flight to safety away from risky assets, into safer assets such
as treasuries, bonds, or JGBs.

As a result, interest rates as applied by these yield curves, I expect it
to be very low for a very long time. In addition, when you look at
inflation swap markets, implied inflation rates are very low. And the
probability of inflation below 1 percent in both the U.S. and the Euro
area, has risen.

Of course, we can never exclude that inflation might shoot up suddenly, but
markets certainly assess that that is a small risk at the moment. Indeed,
most surveys of inflation expectation, or actual inflation releases, have
shown fairly subdued inflation in countries around the world, including
both advanced, emerging, and low-income countries.

So, while we can never exclude that inflation might rise suddenly, or that
interest rates might spike suddenly, at this time the expectation is that
both rates and inflation will remain low for an extended period.

At the same time, some countries might experience higher interest rates
because of risks concerns in these countries. So, not all countries benefit
as much from the lower yields, as countries such as the U.S., Germany, or
japan. Some countries might see somewhat higher interest rates, and that is
certainly a risk for those countries.

MS. ELNAGAR: Thank you, Tobias. We have this second question. The Federal
Reserve has embarked on an unlimited quantitative easing to support the
U.S. economy, but its balance sheet has also grown rapidly.

Therefore, what are the risks to emerging markets and developing countries?
Will the capital flow shock be more severe? And for China, we see during
the outbreak the foreign investors adding to their holdings of Chinese
bonds. Do you think this reflects that investors take China yuan assets as
safe haven assets during the recession? Thank you.

MR. ADRIAN: Yeah, thanks. These were two questions. So, the first question
is about the Federal Reserve balance sheet policy, and the implications for
emerging markets.

The Federal Reserve has embarked on asset purchases of large size with an
expectation that those asset purchases are going to continue. Furthermore,
the Federal Reserve has put into place a number of special facilities to
buy riskier assets as well, including corporate bonds.

These asset purchases support financial conditions, i.e., they help easing
financial conditions, not just in the U.S., but also around the world, as
financial conditions are globally very tightly interconnected.

So, the easing of The Fed alongside the easing of other central banks, such
as the ECB, The Bank of England, The Bank of Japan, and many emerging
markets central banks around the world. This easing of monetary policy is
leading to an easing of financial conditions, and that is already
benefiting emerging markets, as the easier financial conditions are
transmitted around countries.

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Turning to the question about China. So, China was, of course, the first
country to be hit by this horrendous health crisis, and it reacted early by
putting into place aggressive containment measures. So, that led to a much
earlier contraction of the Chinese economy, compared with advanced
economies, or other emerging markets.

At the same time, the Chinese economy is now getting back and is lifting
containment measures so that people can get back to work.

Throughout this period, financial conditions in China didn’t tighten as
sharply as financial conditions tightened in other parts of the world. And
this can be attributed to the very aggressive measures both in terms of
health measures, as well as in terms of financial policies, fiscal
policies, and monetary policies.

And so financial conditions were fairly contained and associated with an
inflow of capital into some asset classes of China.

In total on net, the portfolio flows, though, have been somewhat negative.
So, they have been trending up and down, but the cumulative portfolio flows
year to date have been somewhat negative, and there are now inflows that
are coming back.

MS. ELNAGAR: Okay, we have another question on China, so let’s take this
one. What’s your take on the Chinese authorities’ response to COVID-19
pandemic, particularly on the policy fronts of monetary and financial
systems given the worldwide recession caused by the pandemic? What’s your
advice for Chinese authorities to stabilize the economic recovery and
address financial risks?

MR. ADRIAN: Yeah. This crisis needs a multi-pronged approach. The first
order are, of course, healthcare policies. So, health has to be the first
objective of authorities.

Secondly, targeted fiscal policies have been very successful. The
containment measures are shutting down production and are shutting down
cash flows. So, fiscal transfers to prevent firms from collapsing and
defaulting, and shutting down, and to keep households going in terms of
their cash flow have proven very successful.

So, health, fiscal policy, thirdly, of course, is monetary policy. Monetary
policy in China, along with many other countries around the world, has been
expansionary and that has helped to lift economic activity.

Finally, financial policies that are targeting particularly banks and their
financial markets, are aimed to lead to a loan restructuring in this very
particular crisis, which is expected to last only a couple of months. So, a
restructuring of loans might make sense for many banks in many countries.

MS. ELNAGAR: Thank you, Tobias. We encourage our followers to send their
questions while we’re answering the second question. How does the IMF
assess the performance of the global banking system now, versus the time of
the global financial crisis in 2008?

MR. ADRIAN: The banking system has much more capital, and much more
liquidity than it had at the onset of the 2008 crisis. Capital levels have
increased dramatically as regulations of the banking system have tightened.

Supervisors and the IMF have spent the past decade running supervisory
stress tests and FSAP stress tests, and those have shown that banks are
resilient to very adverse economic scenarios.

Today, of course, we are in a very adverse economic scenario, and under the
WEO baseline we do expect that most banks and most banking systems are
going to be stable.

Of course, some banks — in every country there’s a weak tail of banks, and
in some countries banking systems might be weaker than in other countries.
And furthermore, some countries might be hit particularly hard by this

So, there might be some additional struggles in some banking systems, and
for some banks around the world. But in general, banks are in a much better
place today than they were at the onset of the 2008 crisis.

MS. ELNAGAR: Thank you, Tobias. We are going a couple of other questions.
So, first, when you say the IMF is ready to assert the full weight of its
resources, what do you have in mind? Is the issue of SDRs now urgently
needed to preserve financial stability by underpinning weaker countries?

The second is, given the lack of cooperation so far, how worried are you
about countries not coming together, and what might that look like? Thank

MR. ADRIAN: Absolutely, so what we have seen already in this crisis is that
countries have actually come together. Just this morning the G7 issued a
statement indicating that it was working at debt relief for the poorest
countries around the world.

As a matter of fact, Kristalina Georgieva, the Managing Director of the
IMF, announced yesterday that the IMF is going to work on debt relief for
25 of the poorest countries around the world.

So, there’s quite a bit of momentum around this idea that the low-income
countries, the poorest, and some of the hardest hit countries around the
world are going to get some amount of debt relief; at least, some on a
temporary basis, some on a permanent basis.

The IMF is working very actively with its membership to help countries. The
IMF is there to support its membership of 190 countries in this crisis and
these times of extreme economic and human adversity.

We have a total lending capacity of a trillion dollars, and we are working
on utilizing that lending capacity.

We have received a record number of requests, of countries that have come
to the IMF, to request lending and to request funding, and we have received
over 90 countries. So, more than half of our membership has come to us to
request this funding. We are working very actively to help our membership
to get through this crisis.

There are a number of discussions around an expansion, a further expansion,
of The Fund’s lending capacity and of phasing in new types of programs. But
it’s too early to say where these discussions are going to end up.

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MS. ELNAGAR: Thank you, Tobias. We have another question. What areas due
diligence should banks pursue to mitigate heightened risks of money
laundering and other forms of corruption?

MR. ADRIAN: Thanks for this question. We have seen, indeed, that in this
time of crisis, criminals are taking advantage of the weakness and the
stress that is put onto banking systems. In fact, the number of
cyberattacks is on the rise since the outbreak of the COVID-19 attack.

This is particularly worrisome, threatening, and sad. And we recommend that
supervisors around the world take additional precaution to make sure that
their banking systems are safe. This is very, very important because many
employees around the world are working from home. And so security
weaknesses might be exposed in this environment where staff are not in
their usual office locations, but are working from home. So, operational
risks, cyber risks, and other crimes are of particular concern to
policymakers and, in particular, to bank supervisors and regulators.

MS. ELNAGAR: Thank you, Tobias. We have another question on the actions
taken by the ECB and whether it is enough. Should they take extra measures?

MR. ADRIAN: The ECB has taken aggressive measures. It has phased in a
special purchase program that is aimed at stabilizing the European
economies. And it’s engaging in expansionary monetary policy to help
European economies. I am confident that the ECB is going to take any
additional measures that might be necessary to sustain European economic

Let me to turn to Fabio Natalucci, my colleague who is online, who might
want to add to the ECB’s policy arsenal.

MR. NATALUCCI: Yeah, so as you said, -as Tobias said, the ECB has taken a
number of actions both to a more conventional monetary policy, as well
unconventional monetary policy. And it’s important at this point that
policy action from the monetary policy side — so accompanied also by
fiscal — the fiscal action. And that’s, I think, one lesson that we have
learned looking across countries where there is a combination of monetary
policy — and, again, the ECB had taken bold action to address the impact
of the virus where you get the maximum impact on policy when that is
combined also with fiscal policy as well with financial policies.

MS. ELNAGAR: Thank you, Fabio.

We have something — another question for emerging markets. What is your
advice to emerging markets and developing economies as they confront
unprecedented capital flows? Is there anything new on the Integrated Policy

MR. ADRIAN: Thanks for that question. The Integrated Policy Framework is a
work agenda by Fund staff, which has not yet been fully rolled out. So,
concerning capital flow measures and capital flow policies, the current
institutional view that was phased in about five years ago, is the current
policy framework.

We have, indeed, seen that capital outflows from emerging markets have been
large. More than 100 billion have flown out, and that’s a record number.
It’s much larger, much faster than in the 2008 crisis. It’s reflective of
the general risk aversion of investors. They have allocated away from risky
assets into safe assets, such as cash, or bills, or money market
instruments. And so, emerging markets that are often judged to be riskier
have been hit by these capital outflows.

Emerging markets should take policy measures along four dimensions. First
of all, aggressive healthcare measures are key. The virus needs to be
contained. Secondly, targeted large fiscal policies where fiscal policy
space is available, can help to mitigate the economic impact of the health
containment measures.

Third, monetary policy measures are key and in many emerging markets, there
are deflationary pressures at the moment so that there’s room to cut
interest rates and to ease monetary policy. Indeed, the majority of
emerging markets have already eased monetary policy. We have just seen this
morning that South Africa eased monetary policy.

And fourth, financial policies have to be aimed at banks and other
financial institutions using the levels of capital and the levels of
liquidity that they have accumulated in good times. So, some of that
capital can be drawn down and that is perfectly consistent with regulatory
standards and accounting standards.

MS. ELNAGAR: Thank you. This question was also on Mexico. So I — this
answers his question.

We ask our viewers to have all questions in at this moment. We have two
more minutes to wrap up this. So, if you have no other questions, we ask —
Tobias, thank you very much, Tobias for this. We wish you health. We wish
you safety. Tobias, final word?

MR. ADRIAN: Yeah, let me just reiterate that we are facing an unprecedented
crisis. And it is key to take aggressive policy steps to contain the health
threat, to contain the economic threat, and to contain the financial
stability threat. We are going into this crisis with a banking system that
has more capital and liquidity than in previous crises. And, hopefully, the
aggressive policy measures that have already been rolled out around the
world will help to get us to get our membership through this crisis. The
IMF stands ready to help all of its membership through its lending capacity
to get through this horrendous crisis.

I hope that you are healthy and safe and please watch out for your health.
Thank you very much.

MS. ELNAGAR: Thank you, Tobias. Thank you, Fabio. Thank you.

IMF Communications Department

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email:


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