Sharp drop in stock prices hasn't been a negative for U.S. economy, top IMF official says – MarketWatch

The sharp fall in U.S. stock market prices hasn’t resulted in tighter financial conditions for the U.S. economy, a top official of the International Monetary Fund said Tuesday.
The decline in stock prices DJIA, +1.27% has only returned financial conditions to a “neutral setting,” said Tobias Adrian, the director of the IMF’s monetary and capital markets department, in an interview with MarketWatch.
Through mid-June, the S&P 500 index SPX, +1.73% had tumbled 23% since the beginning of the year and has since recovered 8% of that drop.
“I’m more worried about Eastern Europe because they’re directly exposed to the war and then Africa and the Middle East because of the high prices of food and commodities, Adrian said.
“In developing and emerging market economies, there are many countries in distress. They have to restructure their debt and change their fiscal policies, but the total dollar amount is fairly manageable for the global financial system,” Adrian said. Adrian was speaking after the IMF on Tuesday published an update to its World Economic Outlook.
See: The global economy may soon be teetering on the edge of a recession, IMF says
Banks in advanced economies look “pretty strong and pretty well capitalized,” Adrian said. In emerging markets, there are more worries, he said.
In the shadow banking system, defaults are expected but are not evident yet, Adrian said.
In China, there has been a pretty dramatic downturn in real estate development, but the Chinese economy is still growing, albeit relatively slowly compared to the historical average and the government has “policy space” to intervene, he said.
The financial dislocation in China “remains manageable,” Adrian said.
The market for U.S. Treasury securities is “historically illiquid” but the repo facility set up by the Federal Reserve has taken a lot of the pressure out of the market.
“Market participants can borrow any securities they need from the Fed…so you don’t have scarcity of particular collateral,” he said.
Adrian said he welcomed the European Central Bank’s new bond-buying plan to combat financial fragmentation as bond yields in poorer EU economies rise faster than German bund yields.
“Speaking for myself, I do welcome the design of the anti-fragmentation tool. I think it is going to help ultimately to allow the ECB to tighten monetary policy,” he said.

Climate change is exacerbating conditions in Europe where hotter temperatures are speeding up evaporation.
Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.
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