WASHINGTON — The International Monetary Fund (IMF) on Tuesday warned that the COVID-19 pandemic poses a serious threat to the financial stability, as global financial conditions remain much tighter compared to the beginning of the year.
“Following the COVID-19 outbreak, financial conditions tightened at unprecedented speed, exposing some ‘cracks’ in global financial markets,” the IMF said in its newly-released Global Financial Stability Report, noting market volatility spiked, borrowing costs surged and signs of strain emerged in major funding markets.
“These developments have raised the risk that the inability of borrowers to service their debts would put pressure on banks and cause credit markets to freeze up,” the report said, adding the pandemic crisis presents “a very serious threat” to the stability of the global financial system.
“A prolonged period of dislocation in financial markets could trigger distress among financial institutions, which, in turn, could lead to a credit crunch for nonfinancial borrowers, further exacerbating the economic downturn,” the report warned.
While major central banks have significantly eased monetary policy and provided additional liquidity to the financial system, which helped stabilize investor sentiment in recent weeks, global financial conditions remain much tighter compared to the beginning of the year, according to the report.
“Central banks will remain crucial to safeguarding the stability of global financial markets and maintaining the flow of credit to the economy,” Tobias Adrian, the financial counsellor and director of the IMF’s Monetary and Capital Markets Department, said Tuesday at a press briefing.
“But this crisis is not simply about liquidity. It is primarily about solvency — at a time when large segments of the global economy have come to a complete stop. As a result, fiscal policy has a vital role to play,” he said.
“Together, monetary, fiscal, and financial policies should aim to cushion the impact of the COVID-19 shock and to ensure a steady, sustainable recovery once the pandemic is under control,” said the IMF official.