by Pete Schroeder and Megan Davies
WASHINGTON/NEW YORK, Oct 11 (Reuters) – The International Monetary Fund (IMF) on Tuesday warned of mounting risks to global financial stability, which could spread from market to market in the event of a worsening economic situation.
“Thunderclouds” are gathering over the global economy, including persistent inflation, a slowdown in China and tensions created by Russia’s invasion of Ukraine, IMF says. so much so that the risk of a severe crisis has reached its highest level since the start of the COVID-19 pandemic.
“You have to go back decades to find so many conflicts in the world and at the same time such high inflation,” said Tobias Adrian, director of the IMF’s monetary and capital markets department.
In the new edition of its report on global financial stability, the IMF also highlights the conjunction between the persistent weaknesses of certain markets, the tightening of liquidity, the persistence of inflation and the rise in interest rates for central banks.
“With the rapid decline in investor risk taking recently, linked to the revision of their economic and monetary outlook, there is a danger of a disorderly repricing of risk,” said the IMF report.
“In particular, volatility and a sudden tightening of financial conditions could interact with and be amplified by pre-existing financial weaknesses.”
The year 2022 should be one of the most difficult in recent decades for the stock markets since the Standard & Poor’s 500 index shows a drop of 24% since January 1, the drop exceeds 20% for bonds and the dollar, supported by its status as a safe haven, is at its highest for more than 20 years.
NOT ALL BANKS ARE SHELTERED
The IMF stresses that a serious crisis would particularly affect emerging countries but also notes the widening of yield differentials (“spreads”) on the corporate bond market and the risk of seeing the rise in rates weaken the real estate markets.
In China, the real estate crisis has already worsened and bankruptcies of promoters could cause contagion to the banking sector, warns the IMF.
Banks in advanced economies seem to have sufficient capital and liquidity, but up to 29% of those in emerging countries would no longer comply with global capital rules in the event of a severe global recession, which could require 200 billion dollars of recapitalizations.
“It is quite possible, in a dark scenario, that tensions affect certain institutions,” said Tobias Adrian. “Even if in stress tests that rely on a broadly consistent scenario, we conclude that banks are sound overall, that does not mean that every bank is able to withstand every scenario.”
Tobias Adrian declined to comment on specific cases.
Last week, Credit Suisse, the second Swiss bank, caused concern in the markets, some investors fearing that it would be forced to urgently raise several billion francs in fresh capital to be able to continue its activities. (Report Pete Schroeder and Megan Davies, French version Marc Angrand, edited by Sophie Louet)