IMF markets chief: crisis is severe but we are resilient

Tobias Adrian, the IMF’s head of monetary and capital markets, has seen a lot during more than 20 years of monitoring the US and global financial systems for signs of stress. But he is the first to admit that the implications of coronavirus make it a new phenomenon for him and his colleagues as they contemplate the potential impact on financial systems from Shanghai to Seattle.

“It’s different on a number of dimensions,” Mr Adrian says, speaking from his Washington DC office. He cites the temporary but severe nature of the crisis, plus its highly personal threat and uncertainty around that as reasons why coronavirus is different from other shocks that have assailed global financial sectors in recent decades.

Markets have reacted strongly, with bank stocks around the world falling in February then plunging in early March, when the coronavirus took a serious hold beyond Asia. The falls were prompted by fears of a slowdown and that a pandemic could trigger a wave of defaults. There were further concerns that global economies will take the Federal Reserve and Bank of England’s lead, and that rate cuts — which are bad for bank profits — will become the stock response of policymakers. Bank shares continued their fall into mid-March.

In the US, the Federal Reserve stepped in to prevent a liquidity crunch by buying commercial paper — a form of short-term debt — for the first time since 2008. The Fed began buying assets such as mortgage bonds and encouraged banks to use its discount window to keep their pipes flowing. The European Central Bank is offering cheap loans to banks. The big global central banks have joined together to offer favourable terms on US dollar swaps and cut interest rates.

“Central banks have shown their willingness to act decisively to help alleviate the effects of financial tightening and to support growth, including by cutting policy rates and offering substantial liquidity support to markets,” says Mr Adrian. He adds that fiscal measures such as increased government spending will also be needed “to ensure that support quickly reaches those who confront the most pressing human needs”.

For all the difficulties, Mr Adrian’s first message is one of reassurance. He acknowledges that the impact on the financial sector could be severe in the short term, with defaults rising as supply chains seize up, employees cannot get to offices and factories, and quarantined populations stop spending.

But, he adds: “In general, we think that the banking system is well capitalised at this point. [In many countries] that are under stress now, very recently we have found that these banking systems are resilient, even to large shocks.

“While we don’t know how long the shock is going to last, it is going to be a temporary shock,” he adds. That means struggling borrowers and their economies should rebound.

Despite big falls on exchanges such as the NYSE, Tobias Adrian of the IMF offers a mix of realism and reassurance © Getty

With that in mind, banks could consider “temporary forbearance” for borrowers, he says. “We don’t know how long it’s going to take but the medical profession is telling us that this is going to be resolved. Come the summer that [forbearance] might be a smart business decision and it might be stabilising for the economy as a whole.”

As countries closed bars, banned big social gatherings and imposed travel restrictions, banks across Europe and the US unveiled a range of interest waivers, payment holidays and other supports for borrowers whose livelihoods have been hurt by the virus.

There are risks around how markets will work if traders are banished from offices, since it would be difficult, if not impossible, to comply with regulatory standards from home. For months the finance industry has been discussing the need for waivers with regulators, which have begun agreeing reliefs. Bankers are optimistic of a sensible outcome.

Mr Adrian is realistic about the extent of the difficulties ahead, and their unpredictability. On March 4, the IMF set aside $50bn for countries hit by the virus and said its rapid spread meant that global economic growth in 2020 would be below last year’s 2.9 per cent.

He stresses that “confidence effects are crucial” to the outcome. “Fear is a powerful driver of behaviour, and that can have economic consequences,” he says of people buying up face masks and stockpiling goods.

Another concern is how the non-banking sector will cope. New forms of financial intermediaries such as bond funds and leveraged loans houses have been spawned by large issuance of leveraged loans, high-yield bonds and emerging market debt.

“We don’t really have the experience of going into crisis with these instruments yet . . . The expectation is that they will be resilient, but there’s certainly some degree of uncertainty around that. Since the global financial crisis, we’ve made tremendous progress in terms of having more capital and more liquidity and better resolution regimes for the bank system,” says Mr Adrian, “but less progress has been made for the non-bank financial institutions”.

He and his team will watch events from Washington DC, where IMF central staff are hunkering down after the fund cancelled swaths of country missions in favour of teleconferences to avoid spreading the coronavirus.

“We hope for the best but we prepare for the worst,” he says of his team’s approach. “This is the way to address this crisis. There are lives at stake as well as financial markets, financial stability and economic activity.”