The International Monetary Fund has said that global financial stability risks have increased.
In its new report, the IMF says that the developed countries are deteriorating because of setbacks to economic growth.
The reduction in commodity prices in the emerging economies has had an impact on financial stability.
In a different report, the IMF warned of deterioration in government finances. The report says that risks to government finances are “rising almost everywhere.”
Government finances in rich countries are faced with the same risk factors.
Low inflation and slow growth harden things in attempts to lower public sector debt burdens because both factors affect tax revenues.
High inflation rates is always advantageous to the debtors, governments and others since over time it erodes the real, inflation adjusted value of those debts.
Christine Lagarde, IMF’s managing director, said that “we are on alert, not alarm.”
The report on financial stability states that there is a “growing concern about a mutually reinforcing dynamic of weak growth and low inflation that could produce sustained economic and financial weakness”. The too low inflation in some countries has raised concerns in IMF.
The performance of China’s economy is not certain and this is a factor to be worried about too.
The IMF said that in case the current situation deteriorates further, we should expect an increase in the loss of confidence and renewed bouts of financial market volatility. The costs of borrowing would rise up.
The report goes on to say that “In such circumstances, rising risk premiums may tighten financial conditions further, creating a pernicious feedback loop of fragile confidence, weaker growth, lower inflation, and rising debt burdens.”