Global financial stability - IMF Warning Threat to Global Markets

Submitted by Marco on 13 April, 2006 - 10:49

The International Monetary Fund (IMF) has released a global financial stability report stating critical threats and risks that global world markets are exposed to now and the future. Major causes for concern and the major threats to the global financial markets are higher interest rates and other global "imbalances". Some threats to be aware of are the cyclical risks stemming from tighter credit and higher inflation, bad credit - and the quality of credit provided as well as imbalances that have caused the US current account deficit (cAD) to unprecedented levels. (Isn't their CAD in the trillions somewhere?) Another possible threat although unlikely is a human flu pandemic which could cause a "sharp and deep recession."

The IMF also warned that Australia's bullish economy would not persist (as did the RBA recently). The recent global financial stability and economic recovery was supported by low interest rates and liquidity which led to corporate earnings strengthening and balance sheets improving. On the home front, household balance sheets have also strengthened as a result of rising house prices and a strong stock market recovery.

However the threat of any military confrontation, a terrorist attack or a big price movement with oil may unsettle the global financial stability of the global markets. The IMF also warned against the threat from an avian flu pandemic which could also lead the markets on a fall. The worst case scenario would be that a "large part of the work force would not show up for work, (which) could result in a sharp and deep recession." But if that ever happens, the last thing I would be thinking about would be my money. The IMF advised that regulators give guidance on business continuity plans, testing that essential functions can continue in the event of high absenteeism and a surge in demand for liquidity and cash. The IMF also suggested that a communications strategy should be developed to help minimize market overreaction.