Task 18 Read the article and answer the questions below. Then summarize the contents of the article.
1. Why has pressure eased on emerging market assets?
2. What political event had a negative influence on investment activities in Europe?
3. Why are banks, insurers and pension funds still challenged?
4. What are the reasons to speak about the strengthening of the global financial system?
Financial Stability Challenges in a Low-Growth, Low-Rate Era
Short-term risks have moderated in the past six months as markets have shown resilience to a number of shocks.
Pressures on emerging market assets have eased, helped by firmer commodity prices, reduced uncertainty about China’s near-term prospects, and expectations of lower interest rates in advanced economies. But medium-term risks are rising in a new environment of increased political and policy uncertainty. Expectations for monetary normalization in advanced economies have shifted even further into the future, and weak growth and low interest rates are increasing the challenges for banks, insurers, and pension funds. Although most advanced economy bank balance sheets are robust, sustainable profitability is weak, reflecting unresolved legacy problems and bank business model challenges. Corporate leverage in many emerging market firms has peaked at high levels, and debt servicing capacity remains weak. These developments have complicated the outlook for attaining a more balanced and potent policy mix, and could lead to a prolonged era of economic and financial stagnation.
Policymakers must take a more comprehensive and collaborative approach to protect and advance financial stability and inclusion and revitalize the global economy.
Short-term risks to global financial stability have moderated in the past six months.
As noted in the October 2016 World Economic Outlook (WEO), the macroeconomic outlook has weakened modestly in advanced economies, leaving macroeconomic risks largely unchanged. Central banks have provided additional monetary stimulus in response to the subdued outlook for growth and inflation, which has eased monetary and financial conditions. Easier financial conditions have supported the recovery in risk appetite from the turmoil earlier in the year and the unexpected outcome of Brexit, the June 2016 U.K. referendum result in favor of leaving the European Union.
Emerging market risks have declined, led by a modest recovery in commodity prices and improved external financial conditions, fueling a pickup in capital flows.
The economic outlook has improved for the recession hit economies of Brazil and Russia, while supportive external conditions are providing an opportunity for a smooth deleveraging of firms in many emerging market economies. Market and liquidity risks are still elevated in an environment of extended positioning across major asset classes.
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A key driver of short-term risks in the past six months was the Brexit vote, which caught investors by surprise and initially roiled global markets. The global financial system has been strengthened since the crisis, and the political shock was absorbed by markets:
• Despite the large adjustment in prices, markets managed high volumes well, without significant disruption, and no major disorderly events surfaced, other than a sharp sell-off in some U.K.-based real estate funds. Contingency plans and central bank communications helped underpin confidence in market functioning.
• New firewalls in the euro area, including the European Central Bank’s asset purchase programs and other backstops, supported smooth market adjustment and prevented contagion.
• In contrast with past episodes of global turbulence, flows into emerging markets were resilient and have, in fact, increased since the referendum.
In the aftermath of the Brexit vote, markets quickly rebounded. Equity markets in the United States rose to record levels, and the volatility of major asset classes dropped to levels below where they were at the beginning of the year as markets passed this severe stress test.
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