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IMF Sees Increased Financial Stability Risks Since October 2015

IMF Sees Increased Financial Stability Risks Since October 2015

Daniel Dubrovsky, Contributing Senior Strategist

Talking Points

  • The IMF notes increased financial stability risks since its October 2015 report
  • Advanced economies’ outlook deteriorated, directors call for 3-pronged solution
  • Oil continues to weigh on emerging markets, China spill-overs heightened

Losing money trading Forex? This might be why.

Following up on the International Monetary Fund’s World Economic Outlook, the Financial Stability Report offered a cautious and concerned reflection of the world. The organization noted that risks have increased since its October 2015 report. Members said that the global economy continues to expand, but downside pressures are rising along with volatility and geopolitical tensions. As a result, the organization stressed the need for a broad based policy response.

With advanced economies, such as the United States and European Union, credit risks have heightened for the first time since 2011. Banks have come under pressure from equity price declines and rising credit spreads. The directors agreed that a response should call for a three-pronged approach. This basically involves structural reforms along with cooperation of monetary and fiscal policy so that central banks are not overburdened.

Meanwhile, emerging markets have been under pressure of global headwinds. The mixture of a decline in crude oil prices, slowing growth, and tighter credit conditions have kept financial and economic risks at hand. The IMF pointed out the efforts of certain economies showing “remarkable resilience” to such pressures. They advised emerging markets to follow the same path using efforts such as external buffers, fiscal and monetary policy, and macroprudential and supervisory frameworks.

As for the world’s second largest economy, the IMF said that China’s transition into a more consumer-based nation has increased spill-over effects into the global market. Despite making notable progress in rebalancing its economy and addressing certain financial sector risks, the IMF calls for a more ambitious and comprehensive policy agenda to face higher vulnerabilities. This is needed in order to address the health of the corporate debt sector and dealing with bad assets.

Additional IMF Comments:

  • Euro Area must urgently tackle banks’ nonperforming loans
  • Sees risk of ‘financial stagnation’ dragging on global GDP
  • Advanced economies’ banks have become safer in recent years
  • Brexit would be a negative financial shock to both the U.K., EU
  • Japan needs to ensure no contraction in fiscal stance
  • China should boost on-budget support for consumer spending

Bubble Chart from IMF Data Mapper

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