Press Briefing Transcript: Global Financial Stability Report, Spring Meetings 2025

IMF News, April 22, 2025

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Baseline assessment: "risks have been increasing" driven by two main factors: "the overall level of policy uncertainty has increased" and "the forecast of economic activity going forward is slightly lower."
Net assessment: combination of a lower baseline and larger downside risks, while both downside and upside risks remain present.
Three highlighted vulnerabilities driving the assessment:
- Risky asset values: recent declines but "price-earnings ratios in equity markets... continue to be fairly elevated" and "credit spreads and sovereign spreads have widened to some degree, but they are still fairly contained by historical standards."
- Leverage and maturity transformation, especially in the nonbank sector: monitoring how leverage is evolving; some deleveraging observed as volatility rose, but "market functioning has been sound so far."
- Overall level of debt globally: sovereign debt levels increased "in the past decade, and particularly since the pandemic in 2020"; this higher-debt backdrop interacts with financial stability, affecting emerging markets and frontier economies.

Emerging markets vs. frontiers: distinction emphasized — "major larger emerging markets versus the frontiers."
Current observations:
- Currencies and capital flows "have been relatively muted in this episode" — reflecting resilience among many emerging market economies.
- Tighter global financial conditions "have an outsized impact on weaker economies" and have contributed to widening sovereign spreads for vulnerable countries.
- Issuance year to date has been "strong," but recent tightening over "the past three weeks" poses outsized impacts on vulnerable issuers.
Policy implications and advice:
- Fiscal sustainability: "making sure that fiscal sustainability is being sent the right message" and "credibly rebuild fiscal buffers."
- Market plumbing: deploy mechanisms such as "primary dealers and clearing systems, and pricing mechanisms in government bond markets."
- Country-specific action: strengthen macro frameworks and buffers to lower financing costs and reduce vulnerability to tighter global conditions.

Safe-haven behavior:
- Gold: "strong rally in gold prices" consistent with safe-haven flows amid uncertainty.
- US Treasuries: remain "the baseline reserve asset globally" and "the largest and most liquid sovereign market"; yields have been "increasing in the past two weeks."
- US dollar: recent decline noted — "the dollar has been falling, to some degree" — which is "somewhat unusual" in the context of heightened uncertainty and equity weakness; earlier "strong dollar rally previously" provides context.
Reserve and market metrics:
- US dollars as a reserve asset: "over 60 percent among reserve managers."
- Global stock market capitalizations: "increased to 55 percent most recently, up from 30 percent in 2010."
Market functioning and risks:
- Despite volatility, "market functioning has been very orderly in recent weeks."
- Treasury market moves influenced partly by unwind of leveraged trades (examples cited: "treasury cash‑futures basis trade" and "swap spread trade"), which can amplify price movements.
- VIX moved "from below 20 to between 40 and 50," reflecting elevated volatility, yet authorities have not needed to intervene for liquidity purposes in recent weeks.

Nonbank vulnerabilities: focus on leverage and maturity transformation in nonbank financial institutions; monitoring for disorderly deleveraging.
Dealer intermediation and public debt markets:
- Concern about broker‑dealers' capacity to intermediate as issuance increases and central banks pursue quantitative tightening.
- Importance of monitoring market liquidity and intermediaries' ability to provide liquidity to public debt markets.
Observed behavior in cash demand: modest increases in bank deposits in the United States, but "magnitude is significantly smaller compared to previous episodes of stress."

Opportunities:
- Potentially inclusive productivity gains: "potentially quite inclusive" and can boost productivity; financial institutions exploring AI in back-office operations, trading, and credit decisions.
Risks:
- Cybersecurity: AI can both strengthen defenses and be used for malicious purposes; heightened cyber risk to financial institutions.
- Concentration: risk that "the largest firms with the best models tend to win out and, therefore, dominate the marketplace."
- Speed and market dynamics: "the speed of adjustment in financial markets might be much quicker" with AI-driven algorithms, potentially increasing volatility.
Policy response:
- Supervisors should gather information on AI deployment, identify key players, and pursue international collaboration and market-conduct oversight.

Central bank independence: emphasized as "an important foundation" for achieving price stability and financial stability; IMF advises members to "have a degree of independence" aimed at those goals.
Swap lines and cross-border liquidity: prior episodes (2008, 2020) demonstrated important role of major central bank swap lines in stabilizing market liquidity; these arrangements underpin market functioning by providing foreign-currency funding to partner central banks.

Geopolitical risk: treated as part of the risk set — "when adverse risks realize, there is an asset price adjustment" and "on average... those risks are absorbed well by the financial system," though direct impacts on affected countries can be pronounced.
Climate and physical risks: increased incidence of droughts and floods can be macro‑critical; IMF support via programs and policy advice is available when such developments impact macro stability.

Fiscal policy and debt management:
- Rebuild credible fiscal buffers and focus on fiscal sustainability.
- Provide debt management frameworks to manage increased issuance, including development of market plumbing.
Financial sector resilience:
- Ensure banks maintain "appropriate levels of capital and liquidity" consistent with international standards.
- Monitor and address leverage, interconnectedness, and maturity transformation in nonbanks and market-based finance.
Market infrastructure:
- Develop primary dealer systems, clearing systems, and robust pricing mechanisms in government bond markets.
- Strengthen transparency and supervision of leveraged positions and complex treasury trades that can amplify moves.
International cooperation:
- Enhance supervisor coordination, information-sharing on AI and nonbank activity, and readiness of central bank liquidity facilities where appropriate.

Transcript: Press Briefing Transcript: Global Financial Stability Report, Spring Meetings 2025 — April 22, 2025, IMF Communications Department