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The world is on the road towards greater financial stability, but in order to get there it is necessary to complete several "transitions." That is the main message of the Global Financial Stability Report just published by the IMF.
Although historically less influential than the Fund's World Economic Outlook (WEO), the financial crisis of 2008 has put global financial stability at the top of the agenda. The report provides a comprehensive map of current and future risks, and has become an indispensable tool for assessing the global landscape.
Macroeconomic risks are not the main source of concern. They are, in general, at the same level as six months ago. In the WEO, the forecasted global rate of economic growth for 2014 improved from 1.2 to 2 percent.
The emerging and developing economies are now predicted to grow by 5.1 percent, up from 4.5 percent, although China's rate is projected to decrease from 7.6 to 7.3. The risks of the IMF forecasts are to the downside.
Market and liquidity risks have worsened in the last six months, with increases in the risk premiums of some countries, especially in emerging markets. The reason is the expected change in direction in U.S. monetary policy and, of course, the weaker growth prospects for these economies.
The vulnerability of emerging economies became readily apparent last May when the Federal Reserve warned of the withdrawal of quantitative stimuli through the purchase of government bonds. Investors have lost their appetite for risk, especially in emerging markets, as evidenced by capital outflows and tensions in the foreign exchange markets.
Regarding credit risks, the IMF reports little or no improvement. The reason has to do with the lack of progress in terms of cleaning the balance sheets of major financial institutions, especially in the eurozone. Concerns about the stability of some national banking systems continue unabated.
The slow economic recovery does not leave much room for hope, especially in the peripheral economies, in which governments, companies, and households have not deleveraged enough.
In financial terms, the world is making at least three difficult transitions. One, and perhaps the most delicate, affects emerging markets. They are making the transition from a long period of steady capital inflows to a new one in which characterized by more volatility and higher interest rates.
In the eurozone, the diabolic feedback loop between public debt and banks assets, although less intense than one year ago, remains a major source of concern.
Banks are heavily exposed to domestic government bonds. They now carry on their balance sheets more public debt than at any time since the onset of the crisis.
International investors are reeling, and understandably so. Efforts to create a supervisory union are stalled, but will hopefully bear fruit in the medium term.
The next few months will be crucial. In the U.S., a new leadership will be installed at the Federal Reserve. In Japan the government will seek to consolidate its more expansive stance. Emerging economies will attempt to reverse the declining trend in economic growth rates without igniting inflation. The global financial outlook continues to display many potential signs of trouble. But there is more room today for optimism than at any time in the last five years.
Mauro Guillén is a professor at the Wharton School. Emilio Ontiveros is President of AFI and a professor at Universidad Autónoma de Madrid. They are authors of Global Turning Points, just published by Cambridge University Press.
