LONDON, Sept 12: Turmoil on global financial markets has not derailed the global economic recovery or threatened the stability of the financial system, although risks still linger, the International Monetary Fund said on Thursday.
In its latest quarterly report on the stability of world financial markets published one year after the September 11 terror attacks, the IMF said there had been a “sharp erosion of investor confidence and heightened risk aversion” since March.
Concerns over weak corporate earnings and a series of company accounting scandals had shifted the balance of investor sentiment from caution to anxiety, sometimes bordering on fear, it said.
The bursting of the telecom, media and technology (TMT) bubble also continued to weigh on global stock markets as institutional investors shifted funds away from stocks and low-grade bonds to less risky assets.
But despite significant falls on many financial markets, the global financial system remains resilient, in part because risks have become more widely spread in recent years.
“In addition, market adjustments remained orderly and stopped short of the kind of overall flight from risk that might derail the global recovery or threaten financial stability,” the report said.
“But key risks remain, in particular that retail investors will begin to liquidate their equity holdings and that foreign investors will significantly reduce investment in US equity markets,” it added.
Unveiling the report, Gerd Hausler, director of the International Capital Markets Department, said that after showing some signs of stabilisation in August, world equity markets had resumed their declines.
“Investors’ concerns seem to have expanded and shifted somewhat from a focus on incidences of corporate governance abuses and accounting irregularities as well as earnings uncertainties, to the prospects for slower economic recovery and downward revisions to earnings growth forecasts,” he told reporters here.
In emerging markets, the economic crises in South America have also generated uncertainty about the legal stability and policy continuation in countries with high levels of debt and weak fiscal positions, he said.
This has meant that while investment grade corporate and sovereign borrowers have had ready access to financial markets, high-risk borrowers including those in many emerging markets have had great difficulty securing financing.
High risk borrowers would also be most exposed to any flight to safety that might be sparked by further share price falls, which in turn could be triggered by subdued economic activity, anaemic earnings performance or large sales of shares by institutional investors.
Other risks include renewed crises in emerging market countries and fear of military action in Iraq, which have kept oil prices and risk aversion high, Hausler said.—AFP