The IMF sees the global economy in a ‘synchronized downswing’ and financial markets need to act now to head off the growing risk, the Fund’s Financial Counselor Tobias Adrian said at the launch of the Global Financial Stability Report (GFSR) in Washington Wednesday.
“Loose financial conditions have encouraged investors to take more risks in the quest to achieve their return targets. Valuations appear stretched in some important markets, including equity and credit markets in both emerging and frontier as well as advanced economies,” he warned.
“As a result of easier financial conditions and stretched asset valuations, vulnerabilities have continued to intensify, putting growth at risk in the medium term.”
He said investors are taking on more risk.
“The search for yield among institutional investors, such as insurance companies, asset managers and pension funds has led them to take on riskier and less liquid securities. These exposures may act as amplifiers to shocks. In addition, corporations are taking on more debt and their ability to service that debt is weakening,” said Adrian.
That overall corporate debt at risk has reached a high level.
“In the event of a material economic slowdown, the prospects would be sobering. Debt owed by firms unable to cover interest expenses with earnings, which we refer to as corporate debt at risk, could rise to $19 trillion in a scenario that is just half as severe as the global financial crisis,” he said.
A copy of the full report is available at IMF.org/GFSR.