"Reinventing the risk free asset concept"
From Reactions Magazine:
The demise of
demise of risk-free investing, as highlighted by the IMF’s latest
stability report, is a worrying trend for an industry that relies on
safe assets, says Reactions’ contributing editor Garry Booth.
The
International Monetary Fund’s latest Global Financial Stability Report
includes a chapter that will make interesting reading for the bosses of
big insurers and reinsurers. It is to do with the demise of risk-free
investing, a worrying trend for an industry that relies on safe assets.
The IMF’s analysis notes that the price of assets regarded as safe is
on the rise, with supply dwindling and demand rising amid uncertainty
in financial markets, regulatory reforms, and increased demand from
central banks in advanced economies.
It adds that the growing demand and shrinking supply of safe assets,
predominantly government bonds, could have negative effects on global
financial stability.
The global economic crisis and rising government debt concerns in
some advanced economies have shown that no asset can be viewed as truly
safe, the IMF said.
Absolute safety implicit in credit rating agencies’ highest ratings,
and embedded in financial regulations and investor mandates, created a
false sense of security prior to the crisis. Before the crisis, the
excess demand for assets categorized as safe was driven by booming
emerging economies that had accumulated reserves and used these to buy
large amounts of safe assets.
Now, the demand for safe assets creates pressures due to new
financial regulations that require banks to hold more safe assets;
higher collateral needs for over-the-counter derivatives transactions or
their transfer to centralized counterparties; and the increasing use of
safe assets in monetary policy operations, such as purchases of
government securities by central banks, according to the IMF.
On the supply side, concerns about high government debts and deficits
in some advanced economies have reduced the perceived safety of
government debt, however. Recent rating downgrades of sovereigns,
previously considered to be virtually riskless, show that even
highly-rated assets are subject to risks.
The number of sovereigns whose debt is considered safe has fallen.
The IMF estimates that safe asset supply could decline by some $9
trillion, or roughly 16 per cent of the projected sovereign debt, by
2016. Private sector issuance of safe assets has also contracted sharply
on poor securitization practices in the US....MORE
