WASHINGTON, Dec 13: Further plunges in shaky financial markets may undermine global economic growth, the International Monetary Fund warned in a report on Thursday.

“While a global recovery has been under way, concerns about its pace and sustainability have risen significantly,” said the IMF quarterly Global Financial Stability report.

“There is a risk that further substantial market declines could undermine growth prospects.”

By November 22, Wall Street’s Standard and Poor’s 500 index had slumped 39.1 per cent since its March 2000 peak, the Fund said, although it was up 3.0 per cent from August 12 this year.

“It is important to note that the world’s equity markets have stalled after a sustained rally in October and November,” said the IMF’s director of the international capital markets department, Gerd Haeusler.

“Since recent economic data portrayed a very mixed economic outlook, there is the risk that expectations of a strong and sustained earnings recovery may again be disappointed,” he told a news conference in New York.

International Monetary Fund stressed the need to maintain the financial resilience of the US household sector and the European financial sector.

“The capacity of Japan’s corporate and financial sectors to withstand further sluggish economic growth remains uncertain,” it added.

Investor sentiment had deteriorated during the third quarter, the report said.

“Financial market conditions during the period under review can be characterized by heightened investor risk aversion,” the IMF said.

“Uncertainty and then concern mounted over the strength and durability of the global economic recovery, the prospects for corporate profits and geopolitical conditions.”

A plunge in inflated asset prices was healthy after the financial bubble of the late 1990s and it was appropriate for investors to show more caution, the IMF conceded.

“However, it is important to guard against an excessive swing in the pendulum away from risk taking,” the report said.

“Accordingly, steps to rebuild confidence are needed to restore calmer financial markets and maintain financial stability.”

Market risks had been limited by steep falls in US interest rates, a boom in US mortgage refinancing, tough new rules to improve confidence in US corporate accounting, and efforts to cut costs by both US financial institutions and European banks, the IMF said.

But investors deserted risky emerging markets, with concerns focused on countries and firms with high debts.

“Signs of broad-based contagion in emerging debt markets were limited notwithstanding an increase in volatility,” the IMF said.

“In the primary markets, unsecured access was effectively closed to non-investment grade issuers in Latin America, while Asian and Eastern European issuers experiences relatively open access.”

Overall, cumulative gross issuance of bonds, loans and equities in the nine months to September 30 had dropped well below the level of previous years.

“So long as the external environment remains turbulent and uncertainty over policy continuity in key emerging markets persists, risks for emerging markets will remain elevated.”

Debt in emerging markets was low, it said.

And the ability of some emerging markets to get raise money from the markets at reasonable costs highlighted the importance of pursuing sound economic policies that inspire confidence.—AFP