World financial markets have strengthened, but cyclical challenges are emerging from the prospect of higher interest rates and an unwinding of global imbalances, the International Monetary Fund said today.
In its latest Global Financial Stability Report the IMF said its 2005 assessment of the world financial system gathering resilience had been validated but that new challenges required "a more nuanced view of the financial outlook for the remainder of 2006 and beyond".
Major cyclical risks that lay ahead for financial markets stemmed from higher interest rates and/or higher inflation, worsening credit quality of various debtors and a sudden unwinding of global imbalances, according to the report.
The IMF's top capital markets official warned that a human flu pandemic, while unlikely, posed an "even nastier risk" that could spark a "sharp and deep recession", and he urged countries to ensure they can cope with an avian flu outbreak.
The IMF's capital markets director, Gerd Haeusler, said: "From a financial stability perspective, the near term outlook is as good as it gets, or some would say, even better than that."
But the IMF warned the favourable conditions supporting that would not persist. It cited uncertainties over how fast cyclical conditions would alter, the impact on asset reallocations and price corrections and how well financial systems were cushioned against changes.