International Monetary Fund
Global Financial Stability Report Update, January 2021: Vaccines Inoculate Markets, but Policy Support Is Still Needed

Vaccines and financial stability

The International Monetary Fund (IMF) released its last Global Financial Stability Report update in January 2021. The document provides an assessment of the global financial system and markets, highlighting systemic issues that could pose a risk to financial stability. The report remarks how the Covid-19 vaccine and the monetary and fiscal measures to deal with its economic consequences are essential for the recovery but at the same time may create some vulnerabilities that need to be addressed to avoid putting growth at risk in the medium term.

Some key findings of the report would be as follows:

  • The vaccine effect in the economy: According to the IMF the “approval and rollout of vaccines have boosted expectations of a global recovery”, but at the same time “have lifted risk asset prices, despite rising COVID-19 cases and persistent uncertainties surrounding the economic outlook”. In addition, “inequitable distribution” and “delayed access” to the vaccines may result into an “uneven and partial recovery jeopardizing the health of the financial system”.
  • The IMF encourages to continue with fiscal and monetary policies to support the economy: “Policymakers should continue to provide support until a sustainable recovery takes hold as under delivery may jeopardize the healing of the global economy”.
    However, these “Covid-19 relief packages” have driven markets and asset valuations rise due to “investors betting on a persistent policy backstop”, which so far has mitigated the risk of insolvencies in non-financial corporates and households. The IMF alerts that prospects on these risks and potential corrections “depend critically on the evolution of the pandemic and on the extent and duration of policy support”.
  • The IMF states that banks have not been part of the problem so far but face some challenges such as low levels of profitability (in the low-interest-rate environment) and  credit quality concerns (increasing nonperforming loans once policy support measures end) that may weight on banks’ ability and willingness to lend in the future.

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