IMF: Investor complacency may trigger sharp downturn

The International Monetary Fund (IMF) released its annual Global Financial Stability Report on Wednesday, announcing that the swift arrival of COVID-19 vaccines had buoyed markets and laid the groundwork for a global financial recovery. However, the organization warned that uneven distribution of those vaccines could imperil emerging markets. 

The IMF also highlighted the threat posed by investor complacency as government spending keeps national economies chugging. The report says that complacency could pose risks and trigger a sharp downturn in financial markets. It also urged policymakers to stay the course by keeping interest rates low, while also being on the lookout for potential problems as they attempt to gain the upper hand in dealing with the coronavirus pandemic.

"Financial stability risks have been in check so far, but we cannot take this for granted," according to Tobias Adrian, who heads the IMF's Monetary and Capital Markets Department.

Vaccines fuel hope and complacency

The report also notes record low borrowing rates and hopes pinned on new COVID-19 vaccines have bolstered the outlook for a steady economic recovery — prompting a rise in stock prices, corporate bonds and other risk assets. It says these factors, too, have contributed to market complacency toward the continued economic threat posed by the pandemic.

The IMF's Adrain says markets are "betting that continued policy support will offset any bad economic news in the short term and provide a bridge to the future." He warned, however, that the "disconnect between exuberant financial markets" and the sluggish economic recovery "raises the specter of a possible market correction."

Don't stop now

Though the IMF has projected 5.5% global economic growth for the year, it underscored the importance of national governments in keeping economies afloat in this period of continued uncertainty, with Adrian saying, "Reducing or withdrawing support at this stage could jeopardize the global economic recovery."

Adrian also urged national governments to tackle the problem of financial risks posed by the pandemic, as well as keeping an eye on concerns posed by "excessive risk-taking and market exuberance."

The report states that although banks have used their on-hand capital to maintain credit flow they could become spooked if they fear rising debt levels that affect creditors' ability to pay them back.

The IMF also cautioned that government support is most important in emerging markets that could face additional threats due to the uneven distribution of COVID-19 vaccines. 

js/aw (AFP, Reuters)