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IMF WEEKEND READ - Calling all shareholders

By: Graphic Business
Kristalina Georgieva,  IMF Managing Director
Kristalina Georgieva, IMF Managing Director

In a new op-ed published yesterday in the Financial Times, IMF Managing Director Kristalina Georgieva called for halting all bank dividends and buybacks, writing that shareholders who sacrifice now will prosper when growth restarts.

After the 2008 financial crisis, global regulators required banks to increase their prudential buffers of high-quality capital and liquidity. That significantly strengthened the resilience of the financial system. Many observers now cite those buffers as a bulwark against the adverse effects of the Covid-19 pandemic.

But as we brace ourselves for a deep recession in 2020, and only partial recovery in 2021, this resilience will be tested. Having in place strong capital and liquidity positions to support fresh credit will be essential. One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. These are not insignificant. IMF staff calculate that the 30 global systemically important banks distributed about $250bn in dividends and share buybacks last year. This year they should retain earnings to build capital in the system.

The need to preserve capital is already being recognized and needs to be so more widely. In some countries, banks have voluntarily decided to collectively suspend shareholder payouts and buybacks. In others, supervisors have had to push. In March, the Bank of England asked banks to suspend plans to pay dividends and cash bonuses to executives, indicating it was ready to use its supervisory powers if anyone refused.

“If you don’t like the pandemic, you are not going to like the climate crisis,” said IMF Managing Director Kristalina Georgieva in a recent 40-minute interview on how to rebuild the global economy. Within the next ten years, Georgieva hopes to see positive shifts towards digital transformation, more equitable social safety nets and a green recovery. As the environment recovers while the world grinds to a halt, she urges leaders to maintain low carbon footprints—particularly since the pandemic foreshadows the devastation of global warming.

In the near term, Managing Director Georgieva told Reuters that the IMF was focused on risks, including high debt levels, increased deficits, unemployment, bankruptcies, and increased poverty and inequality during the recovery period. She also said the crisis was boosting the digital economy, offering a chance to increase transparency and e-learning, and give even small firms access to markets.

But the recovery will take time. Speaking to POLITICO, Georgieva predicted that it could take until 2023 for the global economy to return to its pre-coronavirus levels. “The most severe shock has already occurred,” she said, noting that 170 countries have entered negative economic growth since March, and that the global economy is likely to shrink further beyond the current IMF estimate of -3 percent GDP in 2020.

In a wide-ranging 1-hour video discussion with former Australian Prime Minister, Kevin Rudd, from the Asia Society, Managing Director Georgieva said that there are three reasons to be hopeful: the huge scale of government actions in imposing lockdowns; the prospect of an economic bounce-back in 2021, "maybe even late 2020 in some countries", and; the power of science to come up with vaccines.

Governments around the world have put forward swift and significant emergency lifelines to protect people in response to the pandemic. We measured these in the April 2020 Fiscal Monitor and as countries have stepped up their efforts, we've updated the numbers. The total now is about $9 trillion, or $1 trillion more than estimates from just over a month ago.

The breakdown looks like this: direct budget support is currently estimated at $4.4 trillion globally, and additional public sector loans and equity injections, guarantees, and other quasi-fiscal operations (such as non-commercial activity of public corporations) amount to another $4.6 trillion. The upward revision was largely because of a second wave of measures by governments as the economic fallout from the pandemic proves more severe.

In addition to urgent action, there is a renewed focus on resilience. Emerging market economies, for example, are facing an unprecedented combination of domestic and external shocks. The pandemic has led to a sharp increase in global risk aversion and an abrupt retrenchment in foreign capital flows. Based on historical experience, these types of global financial shocks can significantly affect macroeconomic conditions in emerging markets, even if the exchange rate is flexible. Our research in the latest World Economic Outlook shows that these countries can enhance resilience to global financial shocks using macroprudential regulation. Learn more here.

In the case of advanced economies, with interest rates at record lows and public debts at historical highs in many countries, our analysis finds that rules-based fiscal stimulus—where the stimulus is automatically triggered by deteriorating macroeconomic indicators—can be highly effective in countering a downturn under such conditions.

Much the same way COVID-19 hits people with pre-existing health conditions more strongly, so is the pandemic-triggered economic crisis exposing and worsening financial vulnerabilities that have built up during a decade of extremely low rates and volatility. Our recently released chapters of the Global Financial Stability Report focus on three potential weak spots: risky segments in global credit markets, emerging markets, and banks. Should the ongoing economic contraction last longer or be deeper than currently expected, the resulting tightening of financial conditions may be amplified by these vulnerabilities, causing more instability or even a financial crisis.

While rich and poor are equally vulnerable to the debilitating physical effects of the coronavirus, IMF economist Jonathan Ostry says the economic and social impact of the pandemic is much less equal. In a new podcast, he says the poor and the working class bear the brunt of pandemics and that policies need to pay specific attention to prevent long-term damage to the livelihoods of society's most vulnerable.

Compiled by
Rahim Kanani
International Monetary Fund
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