The stability of the global financial system is anchored by favorable economic prospects, but some financial markets' risks have risen, the International Monetary Fund (IMF) said Tuesday. “Global economic conditions have been supportive of a benign financial environment, but underlying risks and conditions have shifted somewhat since … September 2006, and have the potential to weaken financial stability,” the IMF said in its semi-annual Global Financial Stability Report. The IMF noted the U.S. “sub-prime” mortgage market, involving borrowers with poor credit history, as one area of risk. While the damage in the sub-prime mortgage market has been limited to a small number of lenders, the IMF warned the problems could spread to other asset markets, though they are not likely to derail stability in global financial markets. The report also said the recent wave of massive corporate buyouts and mergers reveals a weakening of credit discipline. “So far, target firms are mostly those with high cash flows and low leverage,” it said, adding that “there are signs that credit risks have risen as valuations of target companies are rising.” A collapse in one or more high-profile deals could expose banks and trigger a wider reappraisal of risks across a broader range of credit products, the IMF warned.
