IMF says stability of financial markets as good as it gets

Stability in financial markets is "as good as it gets" with "sharply improved resilience" to sudden crises, particularly in emerging market economies, the International Monetary Fund said yesterday.

Presenting the fund's twice-yearly Global Financial Stability Report, Gerd Häusler, director of international capital markets at the IMF, said concerns about effects of higher global interest rates were overstated.

Recent tightening of monetary policy by the Federal Reserve, the European Central Bank and Bank of Japan had been well-communicated to markets with little disruption. Although risks related to higher inflation, rising corporate debt, the US mortgage market, global imbalances and a flu pandemic remained, Mr Häusler said, they were either extremely unlikely or likely to be limited in their impact.

He stressed the differences between the US and Iceland, which suffered turmoil in its financial markets after running up large trade deficits financed by hot money flows.

The US was a much larger economy, had good prospects for economic growth and highly liquid financial markets, he said.

"You cannot compare a small country to a big country, especially if it is a reserve currency country." In regard to global trade imbalances, he was careful not to contradict his boss, Rodrigo Rato, the managing director of the fund.

He said they were important economic issues that required action. But he downplayed their likely impact in the near-term: "It would not be serious for us to cry wolf and pretend that the dollar was about to collapse in the next six months."

Reduced financial vulnerability of emerging market economies "[ had] been dramatic over the past four years", Mr Häusler added. Such economies had greater exchange rate flexibility, better fiscal discipline, less foreign currency denominated debt, higher reserves and greater policy stability.

But risks persisted. The most pressing, the fund said, was the increase in corporate borrowing, which might lead some companies into trouble if profits dipped below expectations. - (Financial Times Service)