Microsoft Word Thesis Gent (1). doc

 
 
 
 
 
 
 

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19 
Figure 3 Sovereign CDS spreads, in basis points (IMF, 2011) 
 
Source: Bloomberg L.P.; IMF Report 2011
Part of mitigating the effect of the financial crises, is played by the private sector, 
where with improvement of economy the private sector debt-to-GDP ratio should fall. 
However, even that the “banking system have reduced their vulnerabilities by 
increasing their Tier 1 capital ratios”, (IMF, 2011, p.3) the above-mentioned ratio have 
had a significant fall. Besides, Europe banks system is more vulnerable; the US still has 
nonperforming loans that keep high the government debt-to-GDP ratio. As the 
accommodative monetary policies are supposed to encourage the recovery, even with 
the low interest rates there is still high level of private sector debt, while the low 
interest rates may also bring risky investments and create challenges for fixed income 
investors, (IMF, 2011). 
 
 

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20 
Figure 4. Debt-to-GDP by sector 
Sources: Haver Analytics; and IMF staff calculations, 2011. 
As mentioned above, with low interest rates in the advanced countries, the capital flow 
has gone to the emerging markets largely through equity and bond issuance. This cash 
flow is happening mainly because of two reasons, where the assets of emerging markets 
are becoming more favorable, and investors are using the higher interests’ rates of 
emerging market to invest in them and expecting that the exchange rate would 
appreciate eventually. The emerging countries that receive this capital ought to benefit 
from it; however, as the inflow increases these countries do not have a financial system 
that absorbs this continuous capital inflow. Also, the lower-rated entities now will be 
able to issue more debt, thus decreasing the quality of assets held by investors. While in 
some states the capital inflow may have negative impact, in other countries it could 
bring a healthier economy, nonetheless the government should observe each case, 
(IMF, 2011).