## FOREWORD

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### Crisis overview
- The COVID-19 pandemic has triggered a global economic crisis of unprecedented magnitude.
- The World Economic Outlook forecasts a sharp global economic contraction for 2020, with an expected rebound in growth in 2021, but the level of global output is anticipated to remain below precrisis levels for several years.

### Policy response and immediate effects
- Central banks have eased monetary policy across the globe, with a nearly $7.5 trillion balance sheet expansion to date in G10 countries.
- About 20 emerging market central banks have deployed asset purchases for the first time.
- A fiscal policy response of $12 trillion globally has provided substantial support to households and firms.
- The post-2008 regulatory framework has been put to the test and has been proven largely successful, as the global banking system entered the crisis with relatively high capital and liquidity buffers.
- As a result of these policy actions, adverse macro-financial feedback loops that were prevalent in the 2008 crisis have largely been contained.
- Financial conditions have eased significantly and rapidly since late March, allowing continued access to capital market and bank funding and preventing liquidity pressures from turning into broad-based insolvencies.
- Capital flows to emerging markets have started to rebound, with many economies regaining market access.
- Widespread corporate and banking distress has, to date, been contained; the global banking system remains fairly well capitalized against additional adverse shocks.

### Rising vulnerabilities and medium-term risks
- Stretched valuations in risk asset markets persist, despite the September repricing in equity markets, creating a disconnect between the economy and financial market risk assessment.
- Corporate debt is rising and is estimated to be at record levels relative to gross domestic product in most countries.
- There is a weak tail of fragile banks in some countries despite overall resilience.
- Fragilities in the nonbank financial sector became clearly evident during the financial market strains in March, with market volatility jumping, margin calls rising, and liquidity in even the most liquid and deep bond markets drying up.
- Sovereign debt is at historically high levels, posing a critical issue for many low-income countries and some emerging market economies; a debt crisis might be inevitable without prompt and decisive policy action—a theme explored at length in the Fiscal Monitor.

### Policy trade-offs and potential unintended consequences
- Policymakers face stark trade-offs between short-term support and medium-term macro-financial stability risks and need to closely monitor unintended consequences of unprecedented support.
- Corporate sector concern: massive liquidity may lead to significantly higher debt and medium-term resource misallocation, potentially allowing insolvent firms to survive for years.
- Banking sector concern: the usage of buffers may lead to too little capital being available in the future to cushion shocks.
- Capital markets concern: easing of financial conditions may fuel future vulnerabilities.
- Emerging markets and frontier economies concern: limited policy space and continued exclusion from international markets can prevent optimal policies in the short and medium term and create formidable headwinds for macro-financial stability.

### Focus of this Global Financial Stability Report
- Takes stock of key recent market developments and presents a forward-looking analysis of:
  - banks,
  - nonbank financial institutions,
  - nonfinancial firms,
  - emerging market capital flows.
- Attempts to quantify the impact of policies in asset valuation assessments to help policymakers better assess risks to financial conditions.
- Assesses the pandemic’s impact on firms’ environmental performance to gauge the extent of potential reversals of recent gains.
- Underscores the importance of climate policies and green investment packages to support a green recovery and the transition to a low-carbon economy.

*Tobias Adrian, Financial Counsellor*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2020/october/english/foreword.pdf_