Global Financial Stability at Risk: IMF Sounds Alarm on Looming Market Correction

The IMF has warned that global markets are overlooking risks such as trade wars, geopolitical tensions, and government deficits. Overpriced assets and close ties between banks and unregulated firms could lead to a 'disorderly' correction. The IMF calls for urgent fiscal adjustments and comprehensive policy responses.

The International Monetary Fund (IMF) has raised the alarm over potential financial market instability, cautioning that investors are too complacent about existing risks. In its recent Global Financial Stability Report, the IMF pointed out how trade wars, escalating geopolitical tensions, and substantial government deficits, combined with already inflated asset prices, could lead to a 'disorderly' market correction.

One of the immediate concerns has emanated from the latest threats by U.S. President Donald Trump to impose higher tariffs on China, which have added to investor fears, triggering a sell-off in U.S. stocks and affecting cryptocurrencies like Bitcoin. Despite some market resilience since Trump's trade war in April, the underlying optimism obscures potential long-term economic damage due to escalating tariffs and burgeoning government debt.

The IMF's analysis of sovereign bond markets also predicts increased challenges due to growing fiscal deficits. Recent selling in U.S. bond markets underscored these anxieties, although the market did experience a rebound on weaker economic indicators. With calls for 'urgent fiscal adjustments,' the IMF warns of the risks posed by significant exposure to currencies and nonbank financial firms. These firms, under lighter regulation, could exacerbate shocks by transmitting them to the core banking system. Comprehensive policy responses to emerging financial technologies and crypto assets are also recommended.

(With inputs from agencies.)