Covid debt may spark financial Armageddon

LONDON: The massive stimulus money spent by governments during the pandemic has left the global economy vulnerable to another financial crisis, the International Monetary Fund has warned.

Policymakers must tread carefully as they combat a global surge in inflation because unprecedented stimulus during the pandemic has encouraged investors to take excessive risks, causing the valuations of some assets – especially property – to become overly stretched, it said.

The IMF warned that governments were confronted with “a challenging trade-off to maintain near-term support for the global economy while preventing unintended consequences and medium-term financial stability risks”.

With the global economic recovery now coming under pressure from widespread supply disruption and rising inflation, investors are becoming increasingly concerned about the economic outlook, and central banks are edging closer to raising interest rates.

“A sudden repricing of risk in markets, should investors reassess the economic and policy outlook, could interact with such vulnerabilities, leading to tighter financial conditions and putting growth at risk in the medium term,” the IMF said in its latest Global Financial Stability Report.

It said financial stability risks had so far been contained thanks to policy support but that this “masked” vulnerabilities in the financial system. It pointed to “warning signs,” including surging share prices, which far exceed their market fundamentals, and booming house prices.

“If left unchecked, these vulnerabilities may evolve into structural legacy problems, putting medium-term growth at risk and testing the resilience of the global financial system,” it said.

Although central banks should be ready to tighten policy in the face of rampant inflation, the IMF said they’d have to strike a fine balance.

“Policymakers should act pre-emptively to address vulnerabilities and avoid a buildup of legacy problems. They should also tighten selected macroprudential tools to tackle pockets of elevated vulnerabilities while avoiding a broad tightening of financial conditions,” the report said.

Failure to do so could have damaging consequences for the global economy, and poorer countries would bear the brunt of the pain.

The IMF also sounded the alarm over cryptocurrencies, warning that the growth of the crypto asset market – being led by developing countries – could threaten global financial stability without tougher regulation. It was particularly worried about “stablecoins”, digital currencies pegged to traditional currencies