The International Monetary Fund (IMF) said Tuesday that "solid global economic growth" has contributed to the resilience of the global financial markets. In its Global Financial Stability Report released in London and Washington, the IMF concluded that global economic growth, "buoyant financial markets, and improved balance sheets "of the corporate, financial, and household sectors in many countries" have strengthened global economic stability. "Our positive assessment of financial stability is underpinned by the favourable prospect for the world economy," the report said. But despite the positive outlook, the IMF pointed to several risk factors that could threaten financial stability. "If history is any guide, the single most important risk factor for financial markets in good times is complacency," the IMF said. The report states that while there is no discernible single event that could threaten global financial stability, short of "a major devastating geopolitical incident or a terrorist attack", it identifies factors that could contribute to destabilization of the global financial system. "Such risks include disappointing developments as to the narrowing of the U.S. current account deficit, continuing rises in commodity and oil prices feeding through to inflation, larger-than-expected rises in interest rates, as well as negative surprises for corporate earnings and credit quality," the report said. One concern is that if countries continue to build up or even reduce their dollar holdings, the U.S. currency could decline significantly and greatly reduce U.S. domestic demand. This, in turn, could have negative consequences for European and Japanese growth and trigger weaker economic growth globally. The IMF recommends that central banks raise interest rates slowly to a neutral level.
