## execsum ## Source details **Canonical URL:** [execsum](https://www.imf.org/-/media/files/publications/gfsr/2026/april/english/execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2026/april/english/execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2026/april/english/execsum.pdf.json) --- ### Key assessment of current risks - Global financial stability risks are elevated amid the ongoing war in the Middle East, potential inflationary pressures, and rising risks of further tightening in financial conditions. - Markets have corrected in an orderly manner so far, but risks are asymmetric: "The longer the conflict continues, the greater the risk that global financial conditions—which had been very accommodative before the war—could tighten further and more abruptly." - Since February, global equity prices have declined by 8 percent. - Global sovereign bond yields have risen sharply, driven by market expectations of higher inflation. - Emerging market assets have been strongly impacted amid a strengthening dollar and rising energy prices, especially in commodity-importing and more vulnerable countries. ### Channels of amplification and contagion - First: Rising debt-to-GDP levels combined with more price-sensitive investors have led to larger bond yield gyrations on auction days, increasing funding-market tightness and rollover risks for shorter-term securities. Sharp sovereign bond losses could weaken bank balance sheets while governments face constraints in supporting troubled banks. - Second: Emerging markets may face currency and capital outflow pressures as carry trades unwind and terms of trade worsen. Capital flows have taken on a K-shaped pattern, heavily skewed toward debt inflows and carry trades rather than foreign direct investment; frontier economies that issued sizable amounts of debt since the beginning of 2025 could face heightened debt sustainability challenges. The growing role of nonresident nonbank financial investors in emerging markets has increased sensitivity to shifts in global risk sentiment. - Third: An abrupt tightening of financial conditions can force selling by hedge funds, option sellers, leveraged exchange-traded funds, and other nonbank financial intermediaries (NBFIs) that have expanded through leverage. Exuberant options selling and leveraged ETF use could amplify price swings; leveraged hedge fund relative-value unwind could magnify yield gyrations and spill over to other markets. - Fourth: Signs of more borrower defaults in private credit could cascade into broader concerns about corporate credit, particularly for highly leveraged borrowers subject to the artificial intelligence (AI) disruption. Liquidity mismatches in private credit appear limited to semiliquid structures, but investors have accelerated redemptions, wary of worsening borrower credit quality. - Fifth: Booming investments in AI may slow significantly if the conflict persists, weighing on enterprise value of firms along the AI value chain that rely on circular financing arrangements, with hyperscalers in the center; current impact on financial stability appears modest. - Sixth: Simultaneous and larger sell-offs of equities and bonds occur during market downturns, reflecting more frequent supply shocks in recent years. Further shocks raise the risk of forced deleveraging in both asset classes. ### Notable empirical patterns (as reported) - Emerging market net capital flows have shown a K-shaped pattern favoring bonds over foreign direct investment and equities (trailing four quarters as a percentage of GDP, change from 2022:Q4 levels). - Nonresident NBFI holdings in emerging markets are more sensitive to increases in the VIX relative to resident holders (regression estimates of valuation-adjusted change in growth of holdings to a one-standard-deviation increase in the VIX). - Hedge fund leverage has risen across fund strategies (relative value, macro, equity, other, multistrategy) with time-series increases depicted in the referenced figures. - Bond yields show larger reactions on 30-year bond auction days (90th percentile of daily 10-year bond yield changes on 30-year auction days increased across indicated periods). - Historical bear-market episodes show simultaneous negative returns in S&P 500 and Treasuries more frequently in post-2020 periods versus earlier periods. ### Medium-term vulnerabilities highlighted - Growing cross-border interconnectedness with nonbanks increases systemic importance and risk transmission. - Frontier markets face heightened exposure to adverse external shocks due to limited buffers. - Data gaps on NBFIs and cross-jurisdictional exposures impede full assessment of systemic linkages. ### Policy recommendations - Ensure liquidity and funding facilities are accessible and operationally ready to respond to market dysfunction. - Monetary policy should preserve price stability, remain data dependent, and be attuned to spillovers from actual inflation to inflation expectations. - Reinforce strong governance frameworks for central banks and financial sector supervisors to ensure operational independence and accountability. - Emerging market authorities should continue to strengthen policy frameworks; "The shock absorption capacity of exchange rates should be complemented with tools within the IMF’s Integrated Policy Framework." - Fiscal stances should shift toward appropriately tight settings to place public debt on a stable path, with new spending focused on protecting vulnerable groups from the inflation shock. - Strengthen market infrastructure to reduce strains in short-term funding markets—for example, by central clearing repo transactions. - Complete Basel framework implementation, avoid regulatory arbitrage, and resist weakening prudential standards. - As NBFIs grow more leveraged and more connected to banks, close data gaps, improve cross-jurisdictional data sharing, and enhance oversight. - Apply stress tests or scenario analyses to banks and, where possible, to NBFIs to assess the impacts of a potential rise in illiquidity and corporate credit distress. *Source: execsum.* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2026/april/english/execsum.pdf_