Looking on the bright side of the emerging market slowdown

26th September 2012

Speaking as the latest BIS Quarterly Review was published earlier this month, Cecchetti said:

"This could be a welcome moderation that helps put growth in these economies on a more sustained footing but even so it means that the emerging market economies won't support global growth as much as they have in recent years." (quoted in Central Bank News)

Mario Draghi, president of the European Central Bank, gave global financial markets a shot in the arm in late July when he asserted that the Frankfurt-based ECB would do "whatever it takes" to protect the euro. Then on September 6, the Italian-born central bank governor was true to his word when he declared the ECB would buy an unlimited amount of government bonds of eurozone member states if needed. As the BIS Quarterly review of international banking and financial market developments noted:

Details of the ECB's new programme of outright monetary transactions (OMTs) were finally unveiled on 6 September. The programme involves discretionary sterilised purchases of short-term sovereign bonds under certain conditions and is subject to a prior request by the respective country's government for international assistance via the European Financial Stability Facility / European Stability Mechanism (EFSF/ESM).

However the resultant rally, which drove down corporate bond spreads to their lowest levels in a year, should not prompt assumptions that the euro crisis is over. Southern European countries continue to be dogged by fiscal and competitiveness problems that will only be resolved if they maintain their commitment to structural reforms, said Cecchetti.

Even though some progress has been made with reforming the global financial system, Cecchetti said the process is by no means complete. For example, he pointed out that many banks remain dependent on central bank support and that activity in the unsecured interbank markets remains relatively feeble.

In this context, Cecchetti welcomed the fact that many of the world's largest international banks, sometimes known as G-Sifis (globally systemically important financial institutions) are derisking and diminishing their balance sheets, retrenching to domestic markets and reducing leverage. They are also becoming less inter-connected. Cecchetti welcomed the fact banking is becoming more local, and less driven by aggressive international expansion. However he warned that if the pendulum swings too far the other way, a localised and overly fragmented financial market might also pose risks.

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More on Mindful Money:

The Financialist: 'Emerging market investment: looking beyond the BRICS'

Can India resurrect its economy?

China's overdue loans could be a global problem

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