Conflict in the Middle East could yet trigger the kind of turmoil that markets have so far avoided, the International Monetary Fund warned, adding its voice to a rising chorus of concern about the financial stability impact of the war.
In a blog accompanying its semi-annual dispatch on the risks facing the world’s financial system, the IMF said that while markets had shown a “degree of resilience” since the conflict began in February, this “should not be taken at face value.”
“Rather, it reflects cycles of escalation and de-escalation, structural improvements in the financial system, and the absence of a decisive adverse turn that would trigger sustained market drawdowns,” the IMF said on Tuesday.
The report was published as political and finance leaders gathered in Washington for the annual Spring Meetings, which are being overshadowed by the conflict and its threat to global energy supplies and economic growth.
The US and Iran are considering a second round of peace negotiations, after last weekend’s efforts stalled, Bloomberg reported on Tuesday.
The IMF went on to suggest that investors may not have “fully priced in more adverse scenarios” and stressed that the conflict “remains highly unpredictable.” A “prolonged war, triggering stress through channels not yet fully apparent” is a possibility, the IMF said.
That could lead to a chain reaction across global economies already struggling with elevated debt levels, as well as in highly leveraged opaque markets such as private credit, where Bank of England Governor Andrew Bailey has been warning about the war’s potential to herald a reckoning.
“The task for policymakers is therefore not to predict the next shock, but to ensure that vulnerabilities are mitigated and the system remains capable of absorbing stress without amplifying it,” the IMF said. “Amid recurring supply shocks and heightened geopolitical uncertainty, financial stability cannot be taken for granted—it must be actively protected.”
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