Economic Impact of a Pandemic

[Cazandra]

IMF frets about bird flu


4/11/06

http://www.bangkokpost.com/breaking_news/breakingnews.php?id=90341

Washington (dpa) - Despite an upbeat report card on the workings of the world's financial systems, the International Monetary Fund Tuesday saw a few dark clouds on the horizon - including worries about the impact of a potential bird-flu pandemic.

The organisation also warned that there were risks in the rapid growth of private credit in "a number of Southeast Asian countries" and in the dominance of state-owned banks in India and China.

A global avian flu outbreak in humans could cause high absenteeism in the financial industry, interfering with payments, clearing, settlements, trading and communications, the IMF warned in its periodic evaluation of the international finance systems, the Global Financial Stability Report.

In addition, the IMF noted that rising interest rates and tighter credit for the corporate and private sectors may have have "somewhat" increased medium-term risks to financial stability in the last six months.

Elsewhere on the financial scene, the good news seemed to counterbalance concerns, and any cyclical uncertainties for financial markets in 2006 could be defined as "not bad, but not as good as the stellar year 2005," the IMF said.

Concerns over bird flu - which has killed 109 people over the last few years but not made the feared leap to a human epidemic - prompted the IMF to urge large financial institutions to plan "for work from home, heavy demand for cash by the public and transport of key personnel whose functions cannot be done from home."

"The outbreak of avian flu could threaten global financial markets," the IMF warned. It could also lead to a "significant but temporary reduction" in net capital flows to emerging economies, the IMF said.

The IMF urged countries that do not yet have bird-flu plans for their financial systems to establish emergency committees that include central bank officials.

The report was based in part on informal discussions with commercial and investment banks, securities firms, asset management companies and other elements of the world financial system.

In other conclusions from the report, the IMF said:

- Financial systems have strengthened in emerging markets, attracting a 41 per cent increase in direct investments last year over 2003, the report said. That increase applied to emerging Europe, Central Asia, Asia and Latin America. In 2004 alone, $180 billion flowed to emerging markets.

- Credit risk has been dispersed in the ever diversifying international banking sector, though the trend carries "brave new world" worries, such as a lower level of information about how the risk is distributed, the report said.

- Low interest rates have "supported a solid global economic recovery" while "corporate balance sheets have strengthened beyond expectations", especially in the United States, European countries and Japan compared to 2001, the report said. Global property insurance and reinsurance firms have adequately absorbed losses related to the August 2005 Hurricane Katrina disaster in the US.

- "The centre of gravity of growth in financial services continues to shift toward the large and rapidly growing economies of India and China," the IMF said.

Further hikes in oil prices could "create headwinds in financial markets" by pushing up interest rates, slowing growth and putting downward pressure on equity markets, the IMF warned.

- The report warned that global imbalances continued to widen, not only in the US with a current-account deficit now at 6.5 per cent of GDP, but also among emerging markets, which have a total current- account surplus of $500 billion in 2005 and 2006.

"At present, there seems to be a willingness in the rest of the world to accumulate US assets - without any visible risk premium attached," the IMF wrote.

The US attracts so much capital because of its "large, deep, flexible, sophisticated and ... well-regulated financial markets," and because its growth rate is so much stronger than the euro area and Japan, the IMF said.

Much of the oil export windfall in the last year flowed into "offshore bank deposits, predominantly in US dollars," or through US treasury and agency securities bought from British dealers. In 2005 alone, such officially managed assets of large oil-exporting nations may have risen by $300 to $450 billion - at a rate the IMF compared to the annual accumulation by Japan through early 2004, and the accumulation by China through mid-2005.

China, the IMF said, has an estimated total of $600 billion in officially managed assets in the global finance system in 2005.

.

[GaudiaRay]

Re: IMF frets about bird flu

In spite of the reality of a 6.5% current account deficit, the world loans money to the USA because, per the IMF, > The US attracts so much capital because of its "large, deep, flexible, sophisticated and ... well-regulated financial markets," and because its growth rate is so much stronger than the euro area and Japan, the IMF said. <

This is the same logic as the investors took during the internet stock bubble. It doesn't matter if they're losing money, buy them because they are sexy and everyone else is buying them too.

The logic doesn't change; just the size of the players and size of their investments.

We are seeing a fascinating event. The oil surplus and export surplus are competing against each other for the scarce resource, the US dollar bond. Is this hysterically funny or what? The outcome short term is obvious.

What nobody who holds dollars wants to see happen is to see an inflation in dollar backed goods. That would slam the dollar holders. They are the stakeholders in the bankrupting USA. I find this unparalleled and incredibly fascinating. (thx pixie for this post...it's the most succinct, factual and insight-stimulating I've read in a very long time.)

Pow, right in the kisser.

[sharon sanders]

Global Financial Stability Report - IMF 4/06

Link to report for a full read:

http://www.imf.org/external/pubs/ft/...6/01/index.htm

[Snowy Owl]

IMF: Bird flu could trigger global recession

IMF: Bird flu could trigger global recession

http://www.wpherald.com/storyview.php?StoryID=20060411-030645-1940r

LONDON -- A bird flu pandemic could trigger a "sharp and deep" global economic recession if national governments and financial institutions do not act to prepare themselves now, the International Monetary Fund warned Tuesday.

Launching the IMF's annual Global Financial Stability Report in London, Gerd Hausler, director of the institution's international capital markets department, said that a "real, fully-fledged" pandemic where an avian flu strain had mutated to pass from human to human could have a "serious impact" on international financial systems and for the global economy as a whole.
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It could even trigger a disorderly unwinding of global financial imbalances, something that most analysts agreed would have devastating consequences for the world economy given their current unprecedented scale, he said.

The global financial system could be adversely affected by market disruptions and changes in capital flows stemming from an increase in risk aversion, he said. It would also suffer from operational disruptions caused by a sharp increase in worker absenteeism.

"A large part of the workforce would not show up for work, which would ultimately result in a sharp and deep recession," he said. "This is why we are encouraging our membership to do all it can to avoid and prepare for a situation where people panic and stay home from work."

He cautioned that while such an avian flu pandemic was relatively unlikely, the impact could be profound. "It is something the world doesn't talk so much about," he added.

The Global Financial Stability report says that the magnitude and duration of disruptions to financial systems and the world economy would depend not only on the severity of the pandemic but on the degree of preparedness.

While in recent years, financial institutions, central banks and regulators have developed business continuity plans to cope on an operational level with terrorist acts or disasters, planning for a bird flu pandemic has so far been "limited," it notes. The report acknowledges that a number of large financial institutions have extended their preparations, identifying non-essential services in the event of staff shortages, planning for working from home, for the transport of key personnel who could not work from home, and for heavy demand for cash by the public.

However the level of preparedness varies greatly across national authorities and financial institutions, it says.

The report warns that operational disruptions could prevent transactions from being completed and obligations from being met, and could spread from one jurisdiction to others even if they were unaffected by the virus, leading to disorderly changes in asset prices and capital flows.

It also cites potential threats to global financial markets, such as a sharp increase in risk aversion resulting in a rising demand for cash and liquid assets. This would in turn lead to a decline in equity values and an increase in lending premiums. As an avian flu pandemic is expected to spread rapidly across the globe, similar adjustments in asset prices could occur across entire regions, it says. These declines could put financial institutions under stress, it suggests. Market disruptions would become more severe should there be any breakdown in infrastructure leading to limited or intermittent trading.

A pandemic could also lead to significant reductions in capital flows to emerging markets, and some capital flight from residents seeking safe havens, the report says. Based on experience of the SARS threat, it assesses that foreign direct investment plans will change little, though some major investments may be postponed. Some countries, particularly those with high-priced equities or weak public services, or whose current accounts are highly dependent on commodity prices or export flows, may see investors remove portfolios in search of safer options.

In the worst case scenario, the shift in asset allocation caused by an outbreak of avian flu could trigger a disorderly unwinding of current global financial imbalances, the report warns. This phenomenon could be "very nasty," Hausler told Tuesday's press launch -- substantially worse than an unraveling caused by other factors such as a turning of the credit cycle -- with potentially very negative consequences for global financial stability.

To ensure minimal operational impact, the IMF report recommends that national authorities, including regulators, provide guidance on business continuity plans and review those established for adequacy and consistency. Banks and national authorities should test those plans to make certain that they can sustain essential functions over a prolonged period, and to ensure that back-up equipment, telecommunications and data centers are able to deal with the surge in online and remote access activities generated by a large number of people working from home.

Authorities and institutions must also ensure they can meet sharp increases in demands for cash and other liquid assets, and must be prepared to accommodate shock-related price increases, the IMF says.

To minimize market overreaction, countries should develop good internal and international communications strategies, the report suggests. To avoid panic or forced selling into falling markets and to contain asset price deflation, financial regulators should adopt a degree of prudential forbearance, perhaps temporarily easing restrictions and limits, it recommends.

The IMF emphasizes that a fully-fledged avian flu pandemic is by no means inevitable, or even probable, but given the potentially severe impact of such an event, national authorities and financial institutions must prepare now in order to minimize disruption.

[DB]

Re: IMF: Bird flu could trigger global recession

They are starting to let out the truth.

But I think calling it a "Global Recession" is bit incorrect.

IMHO, it is more like a "Global Depression of Unprecedented Magnitude and Scale"

[AlaskaDenise]

Re: IMF: Bird flu could trigger global recession

One thing many businesses need to include in their plan......an orderly shutdown. Severence packages can include seeds.

For industries that can maintain a limited production level, employees may work 1 or 2 days per week.

.

[DB]

Re: IMF: Bird flu could trigger global recession

"The IMF emphasizes that a fully-fledged avian flu pandemic is by no means inevitable, or even probable, but given the potentially severe impact of such an event, national authorities and financial institutions must prepare now in order to minimize disruption."

This is an interesting statement.

While they do not find it probable or inevitable they are telling people to prepare now.

If it is not probable why should anybody put it to the front burner.

This is also from the same bunch of nitwits that destroyed Argentina's economy so I am not all that suprised about this statement.

Every single scientist has warned us, a pandemic is inevitable, it will happen and so therefore it is probable.

It is not a question of if, just when.

You dont instill a sense of urgency by saying something is improbable.

Nitwits.

[GaudiaRay]

Re: IMF: Bird flu could trigger global recession

Florida1 and any other economist here, please tell us what you think of this statement. What does it mean?

I think it means sudden and precipitous deflation in all assets but for cash and near cash, and something called precious metals.

Further, because the precious metals chart says it will experience at some time in the near future a straight up ascent, this may be the "reason"...though the fact is that the facts are always co-opted to fit the market movements...total malarky, but that's what happens repeatedly. (spoken like a truly committed chartist).

For this IMF official to call this possible event "nasty" is quite something! "Nasty" is an understatement. How about "ruinous"?

Florida1, you have strong opinions that are personal that you like to espouse. Pony up. We're ready to learn'em good.

Here's the relevant quote, from above:
>Some countries, particularly those with high-priced equities or weak public services, or whose current accounts are highly dependent on commodity prices or export flows, may see investors remove portfolios in search of safer options.

>In the worst case scenario, the shift in asset allocation caused by an outbreak of avian flu could trigger a disorderly unwinding of current global financial imbalances, the report warns. This phenomenon could be "very nasty," Hausler told Tuesday's press launch -- substantially worse than an unraveling caused by other factors such as a turning of the credit cycle -- with potentially very negative consequences for global financial stability.

[GaudiaRay]

Re: IMF: Bird flu could trigger global recession

PS, please move this to the Economy and out of Headlines. and then toss this request into oblivion. TIA.

[sharon sanders]

Re: IMF: Bird flu could trigger global recession

"Florida1, you have strong opinions that are personal that you like to espouse. Pony up. We're ready to learn'em good."

I will do this after I finish the Daily Update.


S.

[sharon sanders]

Re: IMF: Bird flu could trigger global recession

"LONDON -- A bird flu pandemic could trigger a "sharp and deep" global economic recession if national governments and financial institutions do not act to prepare themselves now, the International Monetary Fund warned Tuesday."

The word "recession" is incorrect. That would imply a short-lived economic consequence. The correct word is depression, at least.

"Launching the IMF's annual Global Financial Stability Report in London, Gerd Hausler, director of the institution's international capital markets department, said that a "real, fully-fledged" pandemic where an avian flu strain had mutated to pass from human to human could have a "serious impact" on international financial systems and for the global economy as a whole."

This is an understatement. The impact could be devastating as the world financial systems are not prepared for at least 30% of the work force to be unavailable across the globe. Both the computer systems used and the personnel to process financial transactions 24 hours a day would be severely hampered. This would cause many delays worldwide for an extended period of time.

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"It could even trigger a disorderly unwinding of global financial imbalances, something that most analysts agreed would have devastating consequences for the world economy given their current unprecedented scale, he said."

This is referring to the fact that China is now the world's "cash cow". Any disruption to the economy of China would have a ripple effect by cutting off the cash that China pumps into the world markets. The other source of world cash are the oil producing countries - cash calves.

"The global financial system could be adversely affected by market disruptions and changes in capital flows stemming from an increase in risk aversion, he said. It would also suffer from operational disruptions caused by a sharp increase in worker absenteeism."

Yes, my friend - Mr. Risk Aversion. As I have said before, if BF begins in, let's say Asia, and makes slow progress for infection spreading first in Southeast Asia, then the world's wealth will flow into the economys best seen as being able to withstand the pandemic. North America is one of those areas. These are also the countries that have the most military might to enforce any needed special power laws.


"A large part of the workforce would not show up for work, which would ultimately result in a sharp and deep recession," he said. "This is why we are encouraging our membership to do all it can to avoid and prepare for a situation where people panic and stay home from work."

"He cautioned that while such an avian flu pandemic was relatively unlikely, the impact could be profound. "It is something the world doesn't talk so much about," he added."

"The Global Financial Stability report says that the magnitude and duration of disruptions to financial systems and the world economy would depend not only on the severity of the pandemic but on the degree of preparedness."

"While in recent years, financial institutions, central banks and regulators have developed business continuity plans to cope on an operational level with terrorist acts or disasters, planning for a bird flu pandemic has so far been "limited," it notes. The report acknowledges that a number of large financial institutions have extended their preparations, identifying non-essential services in the event of staff shortages, planning for working from home, for the transport of key personnel who could not work from home, and for heavy demand for cash by the public."

The demand for cash will be huge and the regional banks are not prepared or this.

"However the level of preparedness varies greatly across national authorities and financial institutions, it says."

"The report warns that operational disruptions could prevent transactions from being completed and obligations from being met, and could spread from one jurisdiction to others even if they were unaffected by the virus, leading to disorderly changes in asset prices and capital flows."

"It also cites potential threats to global financial markets, such as a sharp increase in risk aversion resulting in a rising demand for cash and liquid assets. This would in turn lead to a decline in equity values and an increase in lending premiums. As an avian flu pandemic is expected to spread rapidly across the globe, similar adjustments in asset prices could occur across entire regions, it says. These declines could put financial institutions under stress, it suggests. Market disruptions would become more severe should there be any breakdown in infrastructure leading to limited or intermittent trading."

Yes. However, what is not said here, is that a more rapid spread of the infection will lead to a faster decline of the world financial systems and the world's hedge funds, who are deeply involved in the Southeast Asia area, could collapse which will have an immediate effect on the other markets across the world.

"A pandemic could also lead to significant reductions in capital flows to emerging markets, and some capital flight from residents seeking safe havens, the report says. Based on experience of the SARS threat, it assesses that foreign direct investment plans will change little, though some major investments may be postponed. Some countries, particularly those with high-priced equities or weak public services, or whose current accounts are highly dependent on commodity prices or export flows, may see investors remove portfolios in search of safer options."

Mr. Risk Aversion - see above.

"In the worst case scenario, the shift in asset allocation caused by an outbreak of avian flu could trigger a disorderly unwinding of current global financial imbalances, the report warns. This phenomenon could be "very nasty," Hausler told Tuesday's press launch -- substantially worse than an unraveling caused by other factors such as a turning of the credit cycle -- with potentially very negative consequences for global financial stability."

"To ensure minimal operational impact, the IMF report recommends that national authorities, including regulators, provide guidance on business continuity plans and review those established for adequacy and consistency. Banks and national authorities should test those plans to make certain that they can sustain essential functions over a prolonged period, and to ensure that back-up equipment, telecommunications and data centers are able to deal with the surge in online and remote access activities generated by a large number of people working from home."

"Authorities and institutions must also ensure they can meet sharp increases in demands for cash and other liquid assets, and must be prepared to accommodate shock-related price increases, the IMF says."

CASH, CASH, CASH, CASH. I have said many times that liquidity will be paramount, especially for individuals.

"To minimize market overreaction, countries should develop good internal and international communications strategies, the report suggests. To avoid panic or forced selling into falling markets and to contain asset price deflation, financial regulators should adopt a degree of prudential forbearance, perhaps temporarily easing restrictions and limits, it recommends."

"The IMF emphasizes that a fully-fledged avian flu pandemic is by no means inevitable, or even probable, but given the potentially severe impact of such an event, national authorities and financial institutions must prepare now in order to minimize disruption."

[GaudiaRay]

Re: IMF: Bird flu could trigger global recession

>"Authorities and institutions must also ensure they can meet sharp increases in demands for cash and other liquid assets, and must be prepared to accommodate shock-related price increases, the IMF says."

FL1> CASH, CASH, CASH, CASH. I have said many times that liquidity will be paramount, especially for individuals.

> "To minimize market overreaction, countries should develop good internal and international communications strategies, the report suggests. To avoid panic or forced selling into falling markets and to contain asset price deflation, financial regulators should adopt a degree of prudential forbearance, perhaps temporarily easing restrictions and limits, it recommends."

Shock related price increases... Last Mile Commodities ... Going UP!! UP!!
What are shock-related price increases? Will the cost of doughnuts go up?
Where's the windfall here?

And as to minimizing market overreation by a degree of prudential forebearance, what the IMF is saying to the lenders is "don't foreclose on your loans, dingbats, or else the economies will spin into depression and deflation."
Let's see.. Who wants to be the first to forbear collection on one's receivables. Not Me! I want my money. Every lender will do everything within legal reason to get their money first, as at that time, cash will be king.

Anyone want to speculate further on these events?

I'm quite pleased that the IMF has put it all on the table for us to see. Now, let's look. Gold is looking at $600 and silver at nearly $13. They have to discount the risk, so the price must rise at least some amount.

[sharon sanders]

Re: IMF: Bird flu could trigger global recession

"To minimize market overreaction, countries should develop good internal and international communications strategies, the report suggests. To avoid panic or forced selling into falling markets and to contain asset price deflation, financial regulators should adopt a degree of prudential forbearance, perhaps temporarily easing restrictions and limits, it recommends."

This means that financial systems should have redundant communication systems in place to process transactions. Also, the world's financial regulators, i.e. the Central Banks, should create policies that delay the acceleration clauses in many loans. This would keep many assets from being liquidated in the same time frame in which demand is low. This potential high supply and low demand situation would drive down the prices of these assets. Also to be considerated for temporary suspension would be many banking regulations, especially those that require certain cash reserve requirements and processing time frames.

[sharon sanders]

Re: IMF: Bird flu could trigger global recession

"In the worst case scenario, the shift in asset allocation caused by an outbreak of avian flu could trigger a disorderly unwinding of current global financial imbalances, the report warns. This phenomenon could be "very nasty," Hausler told Tuesday's press launch -- substantially worse than an unraveling caused by other factors such as a turning of the credit cycle -- with potentially very negative consequences for global financial stability."

The shift in asset allocation started last Fall as I have previously said. This paragraph refers, again, to the shift of assets where they are presently to the "safe havens". If done in a rapid fashion, this transfer could, by itself, destabilize socially and politically, those countries where the assets are being transferred from. The Central Banks continously work to maintain the world banking system and preserve the status quo. A shift in the current financial imbalances (that were not caused by them) would disrupt the world monetary system, causing financial havoc.

[GaudiaRay]

Treasury Rate Signals Burdens for Borrowers IT'S OVER !!!

Treasury Rate Signals Burdens for Borrowers

By VIKAS BAJAJ
Published: April 14, 2006

The era of cheap money may finally be nearing its end.
The New York Times

http://www.nytimes.com/2006/04/14/business/14bond.html?hp&ex=1145073600&en=3824af5065b44e8b&ei=5094&partner=homepage

Investors pushed up the yield on the government's benchmark note to over 5 percent on Thursday, its highest point in nearly four years and a signal that many borrowers will soon be paying more on mortgages and home equity loans.

Driven by a stronger economy and a nearly two-year money-tightening campaign by the Federal Reserve, the rising level of interest rates across the board is expected to have the biggest impact on people who took out home loans with low introductory interest rates that are set to adjust in line with market rates in the next few years.

The 10-year Treasury note, which crossed the 5 percent threshold yesterday for the first time since June 2002, serves as a touchstone for a variety of borrowers, from consumers to corporations and governments. But it is most closely tied to mortgages and is likely to play a role in slowing home price increases and curbing the home-buying frenzy in many parts of the country.

"Where you are going to feel the pain the most is on the housing market," said Brian J. Carlin, a vice president at J. P. Morgan Private Bank.

Mr. Carlin estimated that recent homebuyers with adjustable rate mortgages could experience a jump in interest rates of 3 to 4 percentage points in the next two years, as the typical 3 percent introductory rate is adjusted higher in annual increments. For a family with a $400,000 mortgage, that could translate into an increase of as much as $1,000 in monthly interest payments.

Mortgage delinquencies have already started climbing, although they remain at relatively low levels. In the fourth quarter of last year, 4.7 percent of all home mortgages were delinquent, up from 4.4 percent in the third quarter, according to the Mortgage Bankers Association of America. A delinquent loan is one in which monthly payments are past due for 60 days or more.

But experts note that by past standards borrowing costs still remain modest and that the recent interest rate increases may have only a limited effect on economic growth. For many Americans, the growing number of jobs and improvements in incomes are likely to outweigh the impact of higher mortgage costs.

"If we go back six years," said Harold S. Woolley, a managing director at Bessemer Trust, an investment management firm based in New York, "people thought 5 percent was a pretty low rate."

For much of the last year, analysts and policy makers have struggled to explain why long-term interest rates have remained relatively low, given the Fed's campaign to push up interest rates by increasing its benchmark short-term rate, now at 4.75 percent. Investors now expect the Fed to raise interest rates at least once more, to 5 percent, at its meeting next month.

In a speech yesterday, Donald L. Kohn, a Fed governor, said that rising interest rates were likely to slow the economy later this year, primarily by deflating the once-robust housing market. He indicated that he would favor increasing short-term rates further if the economy sharply accelerated or energy prices shot up, because both could ignite higher inflation.

"A tendency for inflation to move higher would put economic stability and the long-term performance of the economy at risk," he told bankers at a luncheon in Oklahoma City. Mr. Kohn said that inflation excluding energy and food costs had so far remained modest at about 2 percent.

On Wall Street, the stock market was little changed yesterday in light trading, in part because the start of Passover this week and the Good Friday holiday led many traders to take time off.

Many analysts say that longer-term interest rates in the United States have been kept low by the purchase of government securities by foreign governments and investors, particularly from Asia.

There are some early indications that foreign buying is easing. In the first week of April, for instance, the Japanese government purchased foreign bonds at a much slower rate than it did during the comparable period from 2003 to 2005, said Wan-Chong Kung, a senior portfolio manager at First American Funds, a mutual fund company in Minneapolis.

"We have seen some moderation in buying from Asia, and I think we will continue to see that," Ms. Kung said, noting that recent interest rate increases by central banks in Europe and Japan were conditioning investors to higher borrowing costs across the world.

The Mortgage Bankers Association estimates that the burden of higher interest costs would fall on about 7 percent to 8 percent of all homeowners. The rest have either paid off their mortgages or face no immediate increase because they took out fixed-rate mortgages or refinanced their earlier loans to mortgages that hold rates steady for 5 to 10 years.

At the same time, new homebuyers will be paying more.

The average national 30-year fixed mortgage interest rate was 6.43 percent last week, up from 6.21 percent at the start of the year and 5.71 percent at the start of 2005, according to Freddie Mac. The introductory interest rate on a five-year adjustable-rate mortgage was up to 6.11 percent, from 5.78 percent in January and 5.3 percent a year ago.