Global Financial Stability May Rise with Trade Tensions, IMF Says

(Reuters) – Risks to the global financial system have risen over the past six months and could rise sharply if emerging market pressures intensify or global trading relationships deteriorate further, the Fund said on Wednesday. International Monetary Fund.

The IMF, whose fall meetings with the World Bank are taking place this week on Bali's Indonesian resort, also noted that while the banking system has been strengthened by regulators over the ensuing decade the global financial crisis of 2008, contribute to an accumulation of vulnerabilities such as high debt levels and "stretched" valuations of assets.

New bank resolution schemes designed to avoid future bailouts are largely untested, said the Fund in its half-yearly update on global financial stability.

"The short-term risks to global financial stability have increased somewhat," said the IMF. "Overall, market participants seem complacent about the risk of a marked tightening of financial conditions."

Tobias Adrian, director of the IMF's capital markets, said that potential shocks to the system could take many forms, such as higher-than-expected inflation that triggers a sharp rise in interest rates or a "messy" outing of Britain from the European Union.

The severity of the impact of these shocks, however, will depend on vulnerabilities, including increasing non-financial debt levels now exceeding 250% of GDP, lower underwriting standards outside the traditional banking sector, and lower levels of debt. high prices of assets likely to fall.

"It is this interaction between the accumulation of vulnerabilities and the decline in asset prices that can have adverse consequences for macroeconomic activity," Tobias said at a press conference.

The rapid growth of China's debt in recent years is also worrying, although the Chinese authorities have taken steps to curb debt growth, he said.

In the report, the IMF said economic growth seemed to have peaked in some major economies as the gap between advanced and emerging markets widened. On Tuesday, the IMF downgraded its global growth forecast due to the escalating trade war between the US and China and mounting financial strains in emerging markets

The United States continues its strong growth and the Federal Reserve raised its interest rates for the seventh time in the last eight quarters at its last political meeting in September. US equity markets are also breaking records.

This contrasts with a slowdown in the euro zone and Japan. The Chinese economy is also showing signs of a slowdown, which could be exacerbated by trade disputes with the United States, which has imposed tariffs on imports from Beijing worth $ 250 billion and is threatening rights of an additional $ 267 billion.

The normalization of monetary policy in the United States, as well as the strengthening of the US dollar and escalating trade tensions have already begun to affect emerging market economies, said the Fund.

A new IMF study shows that emerging countries outside China could face debt portfolio outflows of up to $ 100 billion, a record level for the last time since the global financial crisis.

The Fund cited a number of other short-term risks to financial stability, including the possibility of a "no-transaction" Brexit or new fiscal policy concerns in some euro area countries. heavily indebted.

He also urged global regulators to maintain the measures taken since the financial crisis and to strengthen market liquidity monitoring and increase the amount of capital that banks must put aside to mitigate any recession.

"The financial regulatory reform program should be completed and a reduction of reforms should be avoided," said the Fund. "In order to adequately deal with potential systemic risks, financial regulation and supervision must be used more proactively."