• Home
  • Domestic bonds
  • Russia’s invasion of Ukraine raises ‘multipronged’ stability risks for global financial markets, IMF says

Russia’s invasion of Ukraine raises ‘multipronged’ stability risks for global financial markets, IMF says

By on April 19, 2022 0

The risk of an upheaval in global financial markets has increased “on multiple fronts” in the wake of the war in Ukraine, but so far no major systemic events have materialized, the International Monetary Fund said on Tuesday. in its latest report on stability in the financial sector.

Global financial conditions have tightened considerably, especially in Eastern European and Middle Eastern countries with close ties to Russia.

At the same time, central banks have the task of bringing inflation back to its target while preventing a “disorderly tightening” of financial conditions.

Here are several areas that the IMF says require careful consideration.

Banks’ exposure to Russia could come as a surprise

In the third quarter of last year, well before the start of the war, foreign banks had $120 billion of exposure in Russia. European banks’ direct exposure to Russia is relatively low, with the exception of some non-systemic European banks, the IMF said.

Banks’ indirect exposure is harder to measure and could be a nasty surprise, the IMF said.

US investment funds have some exposure to Russia, but as a share of total assets it is low.

Emerging markets face capital outflow risks

Like the United States, emerging countries have not made balanced budgets a top priority, and this trend has been exacerbated by the pandemic. This additional financing has been covered by domestic banks, with bank holdings of domestic debt reaching historic highs in 2021, the IMF said.

The distress in emerging markets could trigger a negative feedback loop between governments and banks.

Overall, emerging countries face tighter financial conditions and higher risks of capital outflows, the IMF said. The number of issuers trading at distressed levels soared to nearly 25% of all issuers, above pandemic peak levels. Local currency bond and equity flows were under pressure. And the tightening of US monetary policy is likely to increase the downside risk to portfolio flows.

Growing concern over slowing growth in China

There are concerns about slowing growth in China, given the recent sell-off in stocks and rising COVID-19 cases. Ongoing tensions in the struggling real estate sector have heightened risks to financial stability.

“Exceptional financial support measures may be needed to ease pressures on balance sheets, but would further aggravate medium-term debt vulnerabilities,” the IMF said.