Financial Stability risks post covid 19 crisis

The International Monetary Fund publishes an update of its report on Global Financial Stability.

The main messages of the report would be the following:

• Financial conditions have eased, improving since its previous report from last April, due to the rebound in risk assets prices from the minimum levels reached in March and to the continued decline in interest rates.
• “Swift, bold and unprecedented actions by central banks” have favorably fueled market sentiment in favor of a rapid recovery even in emerging markets, whose central banks would have implemented unconventional monetary policy measures for the first time (ie asset purchases) in several countries.
• Despite this optimism, the IMF warns that “high uncertainties regarding the speed and extent of economic recovery continue”, and therefore considers that there is a “disconnection between financial markets and the evolution of the real economy” that may imply an additional risk if the recovery does not have a “V” shape and “the investors´ risk appetite fade”.
• According to the IMF other financial system vulnerabilities that were already in the financial system before the pandemic may be crystallized:
• High levels of debt for some borrowers, especially if the crisis is deeper and longer than expected, could become insolvencies testing the bank resilience in some countries.
• Refinancing risks for some countries.
• Ultimately, the IMF points that “authorities need to continue to support the recovery while ensuring the soundness of financial institutions and preserving financial stability”.