IMF warns of ‘perilous’ path ahead as fragile banking system threatens the world economy
A fresh wave of financial crises could undermine an already weak global economy, the International Monetary Fund (IMF) has warned.
The collapse of Credit Suisse in Europe and US lenders including Silicon Valley Bank (SVB) has already darkened the outlook at a time of sky-high inflation and rising interest rates.
But in its latest Global Financial Stability Report, the financial agency warned of further risks ahead as it highlighted a ‘perilous combination of vulnerabilities that have been lurking under the surface of the global financial system for years’.
Warning: The IMF highlighted a ‘perilous combination of vulnerabilities that have been lurking under the surface of the global financial system for years’
IMF stability chief Tobias Adrian added: ‘Strains are still evident across other institutions as investors reassess the health of the financial system.
‘The emergence of stress in financial markets complicates the task of central banks as they seek to maintain the path towards higher interest rates in the face of stubbornly high inflation.’
The alert came as the IMF warned the global economy was ‘entering a perilous phase’ of low economic growth and rising risks to financial stability at a time when ‘inflation has not yet decisively turned the corner’.
It trimmed its global growth forecasts to 2.8 per cent for this year and 3 per cent for next year and warned that while Britain would fare better than previously feared, it was still on course for a 0.3 per cent contraction in 2023, making it the weakest of the G7 nations.
The scale of the rescue of the American banking system – in the wake of the collapses of SVB and Signature Bank of New York – was also laid bare in the financial stability report.
It shows assistance by the Federal Reserve to struggling US banks has already cost an estimated $400billion and partly reversed efforts by the central bank to shrink its balance sheet. It is a figure which could rise further.
Adrian said that central banks departed from the ‘resolution’ arrangements put in place since the financial crisis in rescuing SVB and Credit Suisse.
But he indicated that when faced with a crisis, such as that encountered by the Bank of England last October over the safety of pension funds, it was necessary to act decisively and speedily.
He said it was critical for central banks to watch deteriorating credit conditions carefully before raising rates further.
The organisation said the loss of confidence in Credit Suisse and US banks has ‘been a powerful reminder’ of the challenges presented by higher interest rates and the build-up in vulnerabilities since the global financial crisis.
In spite of the strong interventions by regulators and central banks, the IMF said market sentiment ‘remains fragile’.
And it warned some institutions are ‘simply unprepared’ for higher interest rates.
‘Market participants failed to adequately prepare for rate increases, possible disruptions in funding markets and links with the rest of the financial system,’ the report said.
Adrian added: ‘Some institutions are simply unprepared for the higher rate environment.
‘The risk-management failures that have been unmasked by the recent episodes are a source of concern.’
