It is the season, in Washington, to warn about risks. In her curtain-raiser for the International Monetary Fund’s spring meetings, Managing Director Christine Lagarde used the word a dozen times. But the threats to the world economy are shifting.
More will be said about this as finance ministers and central bankers arrive in Washington this week and the IMF issues its semi-annual analyses of the state of the world economy. In case you can’t wait, here’s a quick summary of what’s on the minds of the professional worriers at the IMF when they talk about “the rotation of risks.”
* “Macroeconomic risks have decreased,” Ms. Lagarde said. The world economy may be growing at a disappointing pace, but it’s a long way from the recession of just a few years ago. Yet “financial and geopolitical risks have increased.” Especially geopolitical concerns: Think Russia, Ukraine, Syria, Iran, and Yemen. On the financial front, very low interest rates and easy credit may be prompting some investors to make foolish bets in their quest for higher yields. More recently, the sharp moves in the dollar, yen, and euro exchange rates pose a challenge to some economies caught in the cross-fire. Nigeria, for instance, pegs its currency to the dollar even though a rising currency is not what its oil-dependent economy needs right now.
* Risks are shifting from advanced economies, which are gradually healing, to emerging markets, where the variety of ailments include falling commodity prices and side effects of a slowdown in China and internal political tensions. This is, of course, a switch from the Great Recession, when emerging markets were a source of strength amid a financial crisis emanating from the U.S. and (later) Europe.
* Financial risks are shifting away from banks, which have strengthened substantially since the crisis, to non-bank financial institutions such as insurance companies and pension funds struggling to get high enough returns to meet their obligations and the rapidly growing portfolios of mutual funds and asset managers.
* The big questions about financial stability are shifting a bit from the solvency of big banks to the liquidity of markets: the signs, for instance, that market-making dealers are holding smaller inventories of bonds and have less capacity to dampen volatility or the concerns that investors in emerging-market and junk-bond mutual funds may underestimate the difficulty of getting out of those positions in a crisis. As Ms. Lagarde put it: “Liquidity can evaporate quickly if everyone rushes for the exit at the same time—which could, for example, make for a bumpy ride when the Federal Reserve begins to raise short-term rates.”