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IMF warns of heightened credit risk in easy-money era

Washington

EASY-MONEY policies enacted after the financial crisis have led to riskier corporate debt that could jeopardise growth, the International Monetary Fund (IMF) said on Tuesday in a report.

The riskiness of credit globally, which tumbled after the crisis, rebounded to its historic norm in 2016, the last year of available data, said the report.

"As financial conditions loosened in 2017, the riskiness of credit allocation might have risen further," said the IMF report, part of the semi-annual Global Financial Stability Report.

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"This environment has raised concerns among policymakers and market analysts that non-financial corporate credit might have been allocated to risky firms, especially in advanced economies, jeopardising financial stability down the road," the IMF said.

"Although greater risk-taking by financial intermediaries could be part of a healthy economic recovery, it may breed vulnerabilities that could harm future growth if excessive," the report added.

Central banks around the world cut interest rates and undertook massive bond-buying programmes in response to the 2008 financial crisis, ushering in a lengthy stretch of loose monetary policy that has only recently begun to ebb. The US Federal Reserve has undertaken a series of interest rate hikes over the last two and a half years and the European Central Bank has signalled it plans to end its stimulus programme soon.

The report recommended that supervisors monitor credit origination standards "on a continuous basis" and intensify scrutiny during episodes of credit expansion.

The report also noted that credit expansion was less likely to significantly increase risk in cases where banking supervision is more independent, where the government has a smaller footprint in the non-financial corporate sector and where minority shareholder protection is greater.

A February report by S&P Global Ratings also warned that higher corporate debt levels posed a "significant credit risk" that has been partially masked by defaults, which are low "for now". AFP

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