Wednesday, July 30th 2014 - 07:23 UTC

IMF warning on interest rates and Russian crisis for some EU banks

Sharply higher interest rates around the world could combine with weaker growth in emerging markets to slice as much as two percentage points off global growth in the next five years, the International Monetary Fund said on Tuesday.

If the US and UK tighten monetary policy sooner than expected, it could lead to higher borrowing costs worldwide, said IMF Christine Lagarde

 In a report assessing how individual national policies could interact to undermine the world economy, the IMF also warned the conflict between Russia and Ukraine could reverberate to the rest of the region if sanctions against Russia escalate, hitting natural gas supplies to Europe and weakening European banks.

The resulting impact could prompt further impacts in financial markets, in contrast to the recent period of market calm, the IMF said in its 'spillovers' report.

In its worst-case scenario, the IMF said the US and UK could tighten monetary policy sooner than expected, leading to higher borrowing costs worldwide, even as key emerging market growth slows a further 0.5 percentage point over the next three years.

The two developments would reinforce each other, prompting slower growth and hurting in particular those emerging markets with large economic imbalances, such as Argentina, Brazil, Russia and Turkey.

As in past reports, the IMF said monetary tightening in rich nations would have limited negative impact on the rest of the world if it was well-communicated and prompted by better growth prospects. The impact could also be muted if higher U.S. and UK rates come as the Euro zone and Japan continue monetary easing, though this “asynchronous” tightening could cause more global exchange rate volatility.

Central banks in the United States, Japan, the Euro zone and Britain sharply lowered rates to boost growth in the wake of the global financial crisis, but Britain and the United States are now preparing to reverse course.

The IMF said the more sluggish expansion in the developing world, long the engine of the global recovery, was increasingly likely due to structural, not cyclical, factors.

The IMF has downgraded growth projections for emerging markets by a cumulative two percentage points over the last four years. It now expects their annual growth to slow to a 5% rate over the next five years, from an average of 7% growth from 2003 to 2008.

”Given the significant and rising contribution of (emerging markets) to the global economy over the past few decades, their recent slowdown could have far-reaching implications,” the IMF said.

Emerging markets affect the rest of the world largely through trade and financial channels; a one percentage point slowdown in emerging markets leads to a quarter of a percentage point loss in advanced economies, the IMF said.

But a slowdown in key emerging markets, especially Brazil, Russia, China and Venezuela, would also have a big impact on their immediate regions through avenues like oil prices and remittances.

Austrian, French, Italian and Swedish banks are particularly exposed to turmoil in Russia, in addition to holders of foreign bonds and underwriters for credit default swaps, which are affected when credit quality worsens.

12 comments Feed

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1 zathras (#) Jul 30th, 2014 - 07:35 am Report abuse
As a potential saver, interest rates going up would be a great thing.
2 Anglotino (#) Jul 30th, 2014 - 07:50 am Report abuse
So Russia is sabotaging the world economy.

And Venezuela is a “key emerging market”? WTF. Key to what? Chinese oil consumption.

If Venezuela's next door neighbour, Colombia, is booming and growing 4-6% each year then Venezuela's crappy economy doesn't affect anyone but those poor Venezuelans who can't escape.
3 ChrisR (#) Jul 30th, 2014 - 10:58 am Report abuse

It's only the IMF getting their oar in.

Wrong again though. Venezuela an emerging market. What IS this woman on?
4 Brasileiro (#) Jul 30th, 2014 - 01:21 pm Report abuse
South America has a duty to strengthen our trade with Russia in local currency at that time the mob of Western powers trying to destabilize emerging economies.

It is necessary for South America, along with the BRICS, launch economic and financial sanctions against Europe and North America.

Restrict the movement of Western citizens for our territory, excluding Western capital bidding companies in our public sector, prohibiting the importation of “non-strategic” products, freeze cooperation agreements, these are some steps we should take immediately in order to support our Russian allies.

Long live Russia!
5 Tik Tok (#) Jul 30th, 2014 - 03:16 pm Report abuse
@4 No one cares what you say, you have no brains and credibility
6 Captain Poppy (#) Jul 30th, 2014 - 03:26 pm Report abuse
#4 Brassie South American Dictorial Socialism is dead......go back to kicking your Brazilian Soccer balls around.
7 The Voice (#) Jul 30th, 2014 - 04:53 pm Report abuse
#4 Your suggestion to impose sactions on US and Europe is ludicrous. You wouldnt even have an internet and be able to post your sour grape laden drivel on here. If you cant join in an adult discussion dont post anything at all.

As for Russia, I hope Brasil never joins the pariahs club, its the path to poverty.
8 golfcronie (#) Jul 30th, 2014 - 04:56 pm Report abuse
Might be better to kick Brasileiro in the balls might make him see sense, Nah probably not.
9 ChrisR (#) Jul 30th, 2014 - 05:21 pm Report abuse
@ 8 golfcronie

What balls?

The empty one between his ears? :o)
10 Klingon (#) Jul 30th, 2014 - 11:23 pm Report abuse
Whats up with that old bag's fake tan? She looks like a dried out old tea bag.
11 JollyGoodFun (#) Jul 31st, 2014 - 06:12 am Report abuse
Apologies for being a bit off topic here.

The IMF will often give misleading information. It is shrouded in a lot of truthfulness though to hide.

The BRICS nations are trying to move into the IMF territory with a new world bank type institute. It has either been planned or organised by very powerful banking families, or is in direct competition.

Either way we're royally screwed when the bombs are dropped. BRICS are playing with fire, and their is a status quo that shouldn't be tested for fear of ultimate retribution.

Not a chance really that the IMF will be disposed as the international lender to nations, unless they planned it.

So for the IMF to say Venezuela is an emerging market, I take that as soon there will be a coup and a western backed government put in place and then there will be some good growth in Venezuela.
12 Brasileiro (#) Jul 31st, 2014 - 09:37 am Report abuse
Dogs bark and the caravan passes.

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