Hope springs eternal at Spring Meetings

I was in Washington D.C. from April 13 to 19 for the 2015 Spring Meetings of the World Bank Group and the International Monetary Fund. I summarized my first impressions in my April 17 column. I now would like go through the whole nine yards.

The mood was somewhat more optimistic than the doom and gloom of the October Meetings, even though some argued that developed and developing countries alike were entering a new, mediocre period of low growth because of demographics, low investment (which was on everyone’s mind) and low productivity growth.

The major theme, which set the background for all the other discussions, was the resilience of the global economy and emerging markets during the Fed’s policy normalization. Some thought that this shift could set off what the IMF has referred to as the “super taper tantrum”: If the Fed started tightening sooner and faster than expected and markets turned illiquid because of the regulations on banks, U.S. 10-year government bonds could surge more than one percentage point.

Others were more optimistic, arguing for the “Yellen conundrum” – that interest rates would remain very low despite the Fed’s hikes. To support this view, they argued that thanks to the easy money policies of other developed countries’ central banks, long-term interest rates were very low in many countries – and exerting pressure on U.S. rates. I found this view to be more popular, perhaps reflecting the participants’ positive mood.

However, there were many discussions on which emerging markets (EMs) would be the most vulnerable under the super taper tantrum. Not only in the IMF’s latest reports, but also in the seminars organized by investment banks, Turkey and South Africa came out as the most vulnerable of the bunch, whereas worries on the other members of the “fragile five” seemed to have subsided.

With Turkey, other than the country’s worrying vulnerability indicators, the emphasis was also on the upcoming elections and economic policy uncertainty afterwards – especially given that economy tsar Ali Babacan is not be running for re-election – and that Gov. Erdem Başçı will probably not be reappointed. On the positive side, exposure to Turkish assets does not seem to be high at the moment.

I found participants to be more sanguine on China than in October. Almost everyone thought that the country was on the way to rebalancing its economy. The key question was how Chinese policymakers would respond to lower growth. China’s desire to flex its economic muscles was also on the table: The Asian Infrastructure Investment Bank and the inclusion of the yuan in the IMF’s SDRs, the currency the Fund uses to value its accounts, were discussed.

The main negative point of the meetings was Greece. After listening to the German and Greek finance ministers right after one another on April 16, I too lost all hope that the situation would be resolved. The two men could not be more different on key issues about the Greek, and more generally, eurozone economy. On the positive side, everyone seemed to have understood that default would not necessarily be followed by Grexit.

My own meetings concluded at the airport: I ran into a friend from the Central Bank at the lounge. I told him I had full confidence in them – adding, when he smiled and thanked me, that I was shorting the lira. He has not returned my emails since :)…