IMF: Economic insolvencies loom large amid recovering financial conditions

Latest Global Financial Stability Update by the International Monetary Fund (IMF) warned that insolvencies still threaten economic breakthrough despite recovering financial conditions across countries.

The following are the key takeaways from the June update:

• Risk asset prices have rebounded following the precipitous fall early in the year, while benchmark interest rates have declined, leading to an overall easing of financial conditions.
• Swift and bold actions by central banks aimed at addressing severe market stress have boosted market sentiment, including in emerging markets, where asset purchases have been deployed in a number of countries for the first time, helping bring about the easing in financial conditions.
• Amid huge uncertainties, a disconnect between financial markets and the evolution of the real economy has emerged, a vulnerability that could pose a threat to the recovery should investor risk appetite fade.
• Other financial system vulnerabilities may be crystallized by the COVID-19 pandemic. High levels of debt may become unmanageable for some borrowers, and the losses resulting from insolvencies could test bank resilience in some countries.
• Some emerging and frontier market economies are facing refinancing risks, and market access has dried up for some countries.
• Authorities, while continuing to support the real economy, need to closely monitor financial vulnerabilities and safeguard financial stability.