I.M.F. Warns of Risk as Company Debt Grows

WASHINGTON (Reuters) — Easy monetary policy in the United States has led to looser standards for corporate borrowing as company debt continues to grow, posing a risk to financial stability, the International Monetary Fund warned on Wednesday.

Over all, finances around the world have improved in the last six months, and there were few clear signs of asset bubbles, the monetary fund said in its annual Global Financial Stability Report. But it also said that governments must remain vigilant and ensure they are continuing structural and banking improvements, or risk sinking into a chronic financial crisis.

In addition to companies, 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 stayed at 28 percent at the end of last year.

All of this is happening while the United States is still only one-third of the way through the current credit cycle, the Washington-based global lender said. Usually, looser borrowing standards emerge only in the later parts of the cycle, as happened in 2007, the I.M.F. said.

“In the United States, corporate debt underwriting standards are weakening rapidly,” José Viñals, the director of the I.M.F.’s monetary and capital markets department, said in a briefing on the report.

“This is a cause for concern that needs to be monitored.”

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.

The I.M.F.’s analysis could add to questions about the side effects of aggressive monetary easing, which are likely to dominate meetings of finance ministers and central bankers from the world’s top economies in Washington 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 United States 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.

While the I.M.F. says it 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 policy makers to start thinking about the consequences of ending ultra-loose policies.

“I think when the patient is still under treatment, you should not suspend the medicine,” Mr. Viñals said about monetary policies. “But you should always be vigilant for the side effects of the medicine.”

Article source: http://www.nytimes.com/2013/04/18/business/global/imf-warns-of-risk-as-company-debt-grows.html?partner=rss&emc=rss