{
  "title": "IMF Survey: Financial Conditions Strong but Risks Rising",
  "publication": "IMF News, April 12, 2007",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sores052b",
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  "summary": "Global economic conditions are underpinning a positive financial environment, but underlying risks and conditions have the potential to weaken financial stability, the IMF's Global Financial Stability Report says.",
  "authors": [
    "Ina Kota IMF Survey"
  ],
  "publishDate": "2007-04-12",
  "sections": [
    {
      "heading": "Global financial environment — overview",
      "content": "- Global economic conditions are underpinning a positive financial environment.\n- Financial market volatility across a broad range of assets \"remains at remarkably low levels\" and risk spreads \"remain tight,\" according to the IMF's April 10 report.\n- The IMF raised its assessment of market risks because \"a market correction, potentially triggered by a volatility shock,' could be amplified by leveraged positions and uncertainties about concentrations of risk exposures.\"\n- Report date and publication context:\n  - IMF Survey online, April 12, 2007.\n  - Assessment compares conditions to the September 2006 Global Financial Stability Report (GFSR)."
    },
    {
      "heading": "Key short-term market risks (identified in the report)",
      "content": "- The report identified four key areas of heightened short-term risk:\n  - The U.S. subprime mortgage market.\n  - Leveraged buyouts (LBOs).\n  - Capital flows to emerging markets.\n  - Global imbalances.\n- Additional market-wide concerns:\n  - Growth of carry trades as evidence that market participants do not view current low-volatility, high-liquidity conditions as likely to reverse soon.\n  - Competitive pressures and risk models may perpetuate risk taking, potentially causing a collective buildup of investment positions that could lead to a disorderly correction."
    },
    {
      "heading": "U.S. subprime mortgage market — findings and exposures",
      "content": "- The subprime segment of the U.S. housing market is showing \"signs of credit quality deterioration.\"\n- The fallout to date has been \"limited and diffused\" but could deepen and spread to other markets, possibly to structured mortgage credit products held globally.\n- Size and foreign holdings of U.S. residential mortgage-related securities:\n  - Totaling about $5.8 trillion as of January 2007.\n  - Non-U.S. holdings estimated at $850 billion as of mid-2006.\n- Concentration and contagion risks:\n  - Credit risk concentrated among subprime borrowers, but underwriting weaknesses could extend to higher-quality mortgage collateral.\n  - Anecdotal evidence suggests overseas investors and hedge funds have significant exposure to riskier portions of the collateralized debt obligation market exposed to subprime risks."
    },
    {
      "heading": "Leveraged buyouts and corporate credit risks",
      "content": "- Low interest rates and healthy corporate balance sheets have spurred an increase in private equity buyouts, raising leverage for bought-out firms.\n- Characteristics of the current LBO wave:\n  - Target companies are \"much larger\" than in the 1980s and late 1990s.\n  - Use of loans is expanding more than that of high-yield bonds.\n  - So far, target firms are mostly those with strong cash flows and low debt, but some acquired firms have become heavily indebted.\n  - There appears to be less due diligence and a general weakening of loan covenants in recent deals.\n- Overall IMF assessment: credit risks have increased since last September, although from a low level."
    },
    {
      "heading": "Emerging markets, capital flows, and global imbalances",
      "content": "- Capital inflows to some emerging markets have risen rapidly, reflecting improved fundamentals and the search for yield due to low real interest rates in most mature markets.\n- Shift in flow composition:\n  - Movement toward private sector debt flows, especially bank-based flows into emerging Europe and portfolio flows into other regions, including sub-Saharan Africa.\n- Risks and vulnerabilities:\n  - Rapid inflows pose challenges for authorities and could threaten financial and economic stability if flows reverse.\n  - In some countries, strong sovereign external positions may mask vulnerabilities among corporations and banks.\n- Global imbalances:\n  - Downside risk from a possible disorderly unwinding of global payments imbalances \"has receded\" but remains a concern.\n  - Larger role of fixed-income inflows in financing the U.S. current account deficit suggests inflows may be more sensitive to changes in world interest rate differentials."
    },
    {
      "heading": "Rising credit risks and market behavior",
      "content": "- Corporate profits appear robust, balance sheets are strong, credit spreads have declined further, and default rates remain low.\n- However, corporate debt in private markets is rising from low levels due to the boom in leveraged buyout activity.\n- Market participants may be giving insufficient weight to downside risks, assuming low risk premiums are semipermanent.\n- Collective rational risk taking by institutions could raise systemic risks through concentration and leverage."
    },
    {
      "heading": "Policy recommendations and implications for authorities",
      "content": "- The report urges policymakers to manage stability risks by:\n  - Ensuring investors adequately understand and appreciate the risks they are taking.\n  - Paying careful attention to LBO activity, especially large high-profile deals that could trigger wider reassessments of risk.\n  - Monitoring rapid capital inflows to emerging markets and associated private-sector vulnerabilities.\n- Authorities should be alert to amplified effects of a volatility shock given increased linkages across products and markets.\n\nSource: IMF Survey: Financial Conditions Strong but Risks Rising (IMF Survey online, April 12, 2007; Global Financial Stability Report referenced April 10).\n\n---\n\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Research\n- Global Financial Stability Report\n- Webcast of GFSR press conference\n- Transcript of GFSR press conference\n- Financial Market Update\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sores052b"
    }
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    "Authors: Ina Kota IMF Survey",
    "Published: April 12, 2007",
    "Global economic conditions are underpinning a positive financial environment.",
    "Financial market volatility across a broad range of assets \"remains at remarkably low levels\" and risk spreads \"remain tight,\" according to the IMF's April 10 report.",
    "The IMF raised its assessment of market risks because \"a market correction, potentially triggered by a `volatility shock,' could be amplified by leveraged positions and uncertainties about concentrations of risk exposures.\"",
    "Report date and publication context:",
    "The report identified four key areas of heightened short-term risk:",
    "Additional market-wide concerns:",
    "The subprime segment of the U.S. housing market is showing \"signs of credit quality deterioration.\"",
    "The fallout to date has been \"limited and diffused\" but could deepen and spread to other markets, possibly to structured mortgage credit products held globally.",
    "Size and foreign holdings of U.S. residential mortgage-related securities:",
    "Concentration and contagion risks:",
    "Low interest rates and healthy corporate balance sheets have spurred an increase in private equity buyouts, raising leverage for bought-out firms.",
    "Characteristics of the current LBO wave:",
    "Overall IMF assessment: credit risks have increased since last September, although from a low level.",
    "Capital inflows to some emerging markets have risen rapidly, reflecting improved fundamentals and the search for yield due to low real interest rates in most mature markets.",
    "Shift in flow composition:",
    "Risks and vulnerabilities:",
    "Global imbalances:",
    "Corporate profits appear robust, balance sheets are strong, credit spreads have declined further, and default rates remain low.",
    "However, corporate debt in private markets is rising from low levels due to the boom in leveraged buyout activity.",
    "Market participants may be giving insufficient weight to downside risks, assuming low risk premiums are semipermanent.",
    "Collective rational risk taking by institutions could raise systemic risks through concentration and leverage.",
    "The report urges policymakers to manage stability risks by:",
    "Authorities should be alert to amplified effects of a volatility shock given increased linkages across products and markets.",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
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    "[Global Financial Stability Report](https://www.imf.org/external/pubs/ft/GFSR/2006/02/index.htm)",
    "[Webcast of GFSR press conference](https://www.imf.org/external/mmedia/view.asp?eventID=615)",
    "[Transcript of GFSR press conference](https://www.imf.org/external/np/tr/2006/tr060912.htm)",
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