Low U.S. rates spark financial side effects - IMF

WASHINGTON, April 17 Wed Apr 17, 2013 9:09am EDT

WASHINGTON, April 17 (Reuters) - Loose monetary policy in the United States has encouraged weaker standards for corporate underwriting while company debt continues to grow, posing a risk to financial stability, the IMF warned on Wednesday.

Pension funds and insurance companies may also be taking on more risk than they should as they search for higher-yielding assets to fill a funding gap, which for pension funds stood at 28 percent at the end of last year, the International Monetary Fund said in its Global Financial Stability Report.

All of this is happening while the United States is still only one-third of the way through the current business cycle, the Washington-based global lender said.

"Tension is building between the ongoing need for extraordinary monetary policy accommodation and credit markets that are maturing more quickly than in typical cycles," the report said.

The appetite for riskier assets is also spilling over into emerging economies as investors search for higher yields, making these countries more vulnerable to volatile capital flows.

Overall, global financial stability has improved in the last six months and there are few clear signs of asset bubbles, the IMF said. But governments must remain vigilant and ensure they are continuing structural and banking reforms - or risk sinking into a chronic financial crisis.

The IMF's analysis could add to concerns about the side effects of aggressive monetary easing, which is likely to dominate meetings of finance ministers and central bankers from the world's top economies this week.

The Bank of Japan earlier this month pledged to inject $1.4 trillion into its economy to shock it out of stagnation, fanning concerns about currency wars, rising asset prices and speculative buying.

The U.S. Federal Reserve's expansive policies have also prompted worries about asset bubbles, though its easing program is in part meant to push investors to take on more risk to spur economic growth.

Federal Reserve Governor Jeremy Stein said in February he was concerned about possible signs of overheating in some parts of the financial sector, especially in riskier corporate bonds.

While the IMF believes it is appropriate for advanced nations to keep up monetary stimulus for now - while inflation remains low and unemployment high - it is also urging policymakers to start thinking about the consequences of ending ultra-easy policies.

In the financial stability report, the fund urged countries to closely watch banks and companies to make sure they do not take on too much risk, and use buffers against rising leverage.

The IMF also turned an eye to ongoing banking issues in the euro zone, where credit at banks in Cyprus, Greece, Ireland, Italy, Portugal and Spain continues to contract, and weak non-financial companies still have a huge burden of debt.

While Europe has made progress in building up banks' balance sheets, EU banks may need to shed another $1.5 trillion to return to full health, the Fund said.

And the aftershocks from Cyprus's bailout, which imposed a tax on large savers and led to a renewed flight to safe haven assets, showed that markets remain fragile.

The fund called on policymakers to continue to move towards EU banking union to reduce financial fragmentation.

"A key message of this report is that addressing the old risks is essential to leave the crisis behind," José Viñals, the head of the IMF's monetary and capital markets department, said in prepared remarks.

"But it also reduces the need for continued accommodative monetary policies. This will prevent the new risks from growing and from becoming systemic."

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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