The risks to global financial stability
have increased according to the International Monetary Fund.
The IMF says in a new report that the
deterioration in developed countries is partly due to setbacks to
economic growth.
In emerging economies, declines in
commodity prices have affected financial stability.
In a separate report, the IMF also
warns that government finances have deteriorated.
It says the risks to government
finances are "rising almost everywhere".
The reports follow a wider warning on
Tuesday from the IMF about the general global economic outlook.
That downgraded the agency's global
growth forecasts and said the world economy was now more vulnerable
to adverse shocks.
This new warning specifically about
financial stability is partly due to that downbeat economic
assessment.
Those same factors are also a danger
for government finances in the rich countries.
Slow growth and low inflation make it
even more challenging to reduce public sector debt burdens as both
factors undermine tax revenues.
Higher inflation is often helpful for
debtors, governments and others because over time it erodes the real,
inflation adjusted value of those debts.
The thrust of these reports on
stability and government finances is one of rising risks, rather than
imminent crisis.
As the IMF's managing director
Christine Lagarde has put it "we are on alert, not alarm".
The financial stability report says
there is "growing concern about a mutually reinforcing dynamic
of weak growth and low inflation that could produce sustained
economic and financial weakness".
The IMF is also concerned that
in some countries inflation is too low.
Uncertainty about China's economic
performance is also a factor.
The IMF says if the outlook for
economic growth and inflation were to deteriorate further there would
be an increased risk of a loss of confidence and renewed bouts of
financial market volatility (something the world experienced earlier
this year).
Borrowing costs could then rise,
especially for debtors perceived as more at risk of default.
The report continues: "In such
circumstances, rising risk premiums may tighten financial conditions
further, creating a pernicious feedback loop of fragile confidence,
weaker growth, lower inflation, and rising debt burdens."
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