Financial Repression’s Unintended Consequences: Swiss Re Market Consensus

June 16, 2015

Swiss Re has issued a statement, following a meeting with senior private and public sector market participants on June 16, entitled “Financial repression – the unintended consequences.”

The statement said that in order to “identify the most concerning implications,” Swiss Re held the meeting jointly with the Institute of International Finance (IIF) and The Geneva Association, and decided to “share the key conclusions with the wider financial community to help to foster further debate on this important issue.

“It is widely recognized,” the statement said, “that the extent of the latest financial crisis has warranted swift implementation of a number of extraordinary measures to mitigate a deep recession. But while much has been achieved, the economic recovery remains fragile and uneven. It is due time to take note of the possible implications of those measures for the financial system.

“While recognizing that extraordinary monetary policies may have been necessary to support the global economy following the financial crisis, participants expressed concern about sustained official sector policies that are keeping interest rates at historically low levels. They are also apprehensive about the incentives for institutional investors to hold government debt instruments.”

Swiss Re said the policies and actions that have been implements “mask a number of potential unintended consequences for the real economy and for the proper functioning of global capital markets.

“Financial repression not only results in a ‘tax’ on households today since it prevents them from earning interest on their deposits; it also means future generations will have to shoulder the long-term costs – including the underfunding of pension provisions.

“At present, the need to increase savings to compensate for low interest rates has weakened consumption growth, resulting in poor economic recovery and adding to the excess of cash in search of yield.”

The statement further indicated that these “distortions created in capital markets – in particular a possible mispricing of risks – must be considered.

“Participants also noted that the unprecedented active participation of public institutions in private markets risks crowding out private investors and thus reducing the diversification of funding sources – whereby a key element of financial stability is at risk of being weakened.

“Considering these possible consequences, the participants will continue to actively engage in the international debate and work together to build the foundation of stronger and sustainable economic growth, benefitting society and long-term investors alike.

“There’s no doubt that the global financial crisis has been addressed with extraordinary official policies. But seven years later, it is time to move on. The unintended consequences must now be taken into account to ensure a more balanced policy approach for the future.”

Source: Swiss Re

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