IMF sounds alarm on corporate debt market

washington — The International Monetary Fund heightened its warnings for the corporate debt market on Wednesday, as investors search for richer returns in riskier assets after interest rate cuts by central banks.

The IMF, whose fall meetings with the World Bank begin in Washington this week, also warned the main drivers of downside risks to the global economy remained ongoing trade tensions and policy uncertainty.

A major geopolitical event, like the UK exiting the EU without a new agreement in place, could trigger a sharp tightening of financial conditions, the IMF said in its bi-annual Global Financial Stability Report.

The IMF and other economic policymakers have expressed concern over high levels of risky corporate debt in the past. But the group said Wednesday that attempts by central banks worldwide to lower interest rates to combat immediate economic risks has exacerbated the situation, leading to “worrisome” levels of debt with poor credit quality and increasing financial vulnerabilities over the medium term.

The IMF warned that 40 per cent of all corporate debt in major economies could be considered “at risk” in another global downturn, exceeding levels seen during the 2008-09 financial crisis. “While easier financial conditions have supported economic growth and helped contain downside risks ... in the near-term, they have also encouraged more financial risktaking and a further buildup of financial vulnerabilities,” the report said. —