Swiss Re Sounds Alarm on ‘Financial Repression’

Much has been achieved since the 2008 financial crisis, but the economic recovery remains fragile and uneven, says Swiss Re.

The world’s second-biggest reinsurer adds that the possible long-term implications for the financial system of “extraordinary measures” to mitigate a deep recession – such as low interest rates and quantitative easing (QE) – must now be considered.

To identify the most concerning implications, Swiss Re held a meeting with senior private and public sector market participants on June 16, entitled
‘Financial repression – the unintended consequences’
.

The group, together with the Institute of International Finance (IIF) and The Geneva Association, says it has decided to share the key conclusions with the wider financial community to help to foster further debate on this important issue.

“While recognising 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,” reports Swiss Re.

“They are also apprehensive about the incentives for institutional investors to hold government debt instruments. These policies and actions mask a number of potential unintended consequences for the real economy and for the proper functioning of global capital markets.”

Swiss Re comments that financial repression not only results in a ‘tax’ on households today as it prevents them from earning interest on their deposits; but 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.

“Furthermore, the distortions created in capital markets – in particular a possible mispricing of risks – must be considered.”

Meeting 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. This means that 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,” the reinsurer reports.

“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.”

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