GFSR Market Update

Last Updated: July 26, 2012

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July, 2012:  Risks to financial stability have increased since the April 2012 Global Financial Stability Report (GFSR). Sovereign yields in southern Europe have risen sharply amid further erosion of the investor base. Elevated funding and market pressures pose risks of further cuts in peripheral euro area credit. The measures agreed at the recent European Union (EU) leaders’ summit provide significant steps to address the immediate crisis. Aside from supportive monetary and liquidity policies, the timely implementation of the recently agreed measures, together with further progress on banking and fiscal unions, must be a priority. Uncertainties about the asset quality of banks’ balance sheets must be resolved quickly, with capital injections and restructurings where needed. Growth prospects in other advanced countries and emerging markets have also weakened, leaving them less able to deal with spillovers from the euro area crisis or to address their own home-grown fiscal and financial vulnerabilities. Uncertainties on the fiscal outlook and federal debt ceiling in the United States present a latent risk to financial stability. Text also available in: عربي; 中文; Español; Français; 日本語; Русский.

January, 2012:  Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems. European policymakers have outlined significant policy measures to address the medium-term issues contributing to the crisis, and some of these have helped to improve market sentiment, but sovereign financing remains challenging and downside risks remain. If funding challenges result in a round of deleveraging by banks, this could ignite an adverse feedback loop to euro area economies. The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro area crisis, and some have homegrown challenges to the removal of financial tail risks, including overcoming political obstacles to achieving an appropriate pace of fiscal consolidation. Developments in the euro area also threaten emerging Europe and may spill over to other emerging markets. Further policy actions are needed to restore market confidence. This effort will require building larger backstops for sovereign financing, assuring adequate bank funding and capital, and maintaining a sufficient flow of credit to the economy, possibly by establishing a "gatekeeper" charged with preventing disorderly bank deleveraging.
Text also available in: عربي; 中文; Español; Français; 日本語; Русский.

June 17, 2011:  Since the publication of the April 2011 Global Financial Stability Report (GFSR), financial risks have risen for three reasons. First, while a multi-speed global recovery remains the base case, downside risks to this baseline have increased. Second, concern about debt sustainability and support for adjustment efforts in Europe’s periphery is leading to market pressures and worries about potential contagion. Political risks are also raising questions about medium term fiscal adjustment in a few advanced countries, notably, the United States and Japan. Third, notwithstanding some recent pullback in risk appetite, the prolonged period of low interest rates may push investors into riskier assets in a “search for yield.” This trend has the potential to build financial imbalances for the future, particularly in some emerging markets. Against these tensions, deep-seated challenges remain. Although there has been progress, improvements in financial system robustness have been insufficient so far. Markets may lose patience and become disorderly if political developments derail momentum on fiscal consolidation and financial repair and reform. Given these risks, policymakers need to accelerate actions to address long-standing financial vulnerabilities as outlined in the GFSR, before the window of opportunity to do so closes.
Text also available in: عربي; 中文; Español; Français; 日本語; Português; Русский.

January 25, 2011:  Nearly four years after the onset of the largest financial crisis since the Great Depression, global financial stability is still not assured and significant policy challenges remain. Balance sheet restructuring is incomplete and leverage is still high. The interaction between banking and sovereign credit risks in the euro area remains a critical factor. At the global level, regulatory reforms are still needed to put the financial sector on a sounder footing. At the same time, accommodative policies in advanced economies and relatively favorable fundamentals in some emerging market countries are spurring capital inflows, so emerging countries must watch for signs of asset price bubbles and excessive credit.
Text also available in: عربي; 中文; Español; Français; Русский.

July, 2010:  Despite generally improved economic conditions and a long period of healing after the failure of Lehman Brothers, progress toward global financial stability has recently experienced a setback. Sovereign risks in parts of the euro area have materialized and spread to the financial sector there, threatening to spill over to other regions and re-establish an adverse feedback loop with the economy. Further decisive follow-up is needed to the significant national and supranational policy responses that have been taken in order to strengthen confidence in the financial system and ensure continuation of the economic recovery. Text also available in: عربي; 中文; Español; Français; 日本語; Русский; and 한국어.

January, 2010:  Systemic risks have continued to subside as economic fundamentals have improved and substantial public support remains in place. Despite improvements, financial stability remains fragile in many advanced countries and some hard-hit emerging market countries. A top priority is to improve the health of these banking systems so as to ensure the credit channel is normalized. The transfer of financial risks to sovereign balance sheets and the higher public debt levels also add to financial stability risks and complicate the exit process. Capital inflows into some emerging market countries are beginning to raise concerns about asset price and exchange rate pressures. Policymakers in these countries may need to exit earlier from their supportive policies to contain financial stability risks. For all countries, the goal is to exit from the extraordinary public interventions to a global financial system that is safer, but retains the dynamism needed to support sustainable growth.
Text also available in: عربي; 中文; Español; Français; 日本語; Русский; and Tiếng Việt.

July, 2009:  Financial conditions have improved, as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. Nonetheless, vulnerabilities remain and complacency must be avoided. The financial sector continues to be dependent on significant public support, resulting in an unparalleled transfer of risk from the private to the public sector. At the same time, however, work will need to begin on exit strategies from the various financial, monetary, and fiscal support policies in order to address market uncertainty. Medium-term policies need to ensure that steps taken to normalize policies and markets are consistent with establishing a lasting framework of sound financial regulation, sustainable fiscal balances, and the maintenance of price stability.
Text also available in: عربي; 中文; Español; Français; 日本語; русский.

January, 2009:  Risks to financial stability have intensified since October 2008. Financial markets worldwide reflect ongoing deleveraging pressures amidst a deepening economic downturn. In spite of extensive policies, the global financial system remains under intense stress.
Text also available in: عربي; 中文; Español; Français; 日本語; русский.
Charts (pdf file in English only)

January, 2008:  Global financial market conditions have worsened since the publication of the October 2007 Global Financial Stability Report as the fallout from the subprime mortgage crisis widens. What began as a test of the structured credit markets and the associated funding needs has reached a new phase where credit concerns now extend beyond the subprime sector.
Text also available in: عربي; 中文; Español; Français; 日本語; русский.
Charts (pdf file in English only)

July, 2008:  Global financial markets continue to be fragile and indicators of systemic risk remain elevated. Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. The resilience of emerging markets to the global turmoil is being tested as external financing conditions tighten and policymakers face rising inflation.
Text also available in: عربي; 中文; Español; Français; 日本語; русский.
Charts (pdf file in English only)

July, 2007 (pdf file 290kb): Financial stability risks have evolved largely as foreseen in the April 2007 Global Financial Stability Report, with a rise in credit and market risks but continued strong macroeconomic performance underpinning overall financial stability.
Text also available in: عربي; 中文; Español; Français; 日本語; русский.
Charts (pdf file in English only)

December, 2006 (pdf file 465kb): The September 2006 Global Financial Stability Report presented a baseline scenario of solid global growth, contained inflation, and continued financial stability. However, it reported that risks were tilted to the downside. Growth could slow more sharply if the U.S. housing market were to weaken rapidly; inflation could spike, possibly reflecting rising energy prices; and a disorderly unwind of global imbalances remained a threat. Developments since then have been broadly in line with the baseline scenario. Market sentiment has gravitated toward a central scenario for a benign slowdown which keeps inflationary pressures contained. But downside risks remain and there have been changes in underlying financial conditions that warrant continued vigilance.

June, 2006:  Since the release of the April 2006 GFSR, global financial markets have experienced increased volatility and a sharp correction in the price of riskier assets, in particular mature market equities and emerging market assets. Inflationary pressures have resulted in a synchronized tightening of global monetary policies, and perceived downside risks for growth, triggering selling in global equity markets and an unwinding of leveraged carry-trade positions. The fall in investor risk appetite is a normal and healthy market adjustment that should better position markets to deal with the pressures at this stage in the global financial and economic cycle. For emerging markets, the sell-off reflects a rise in risk premia, but not a reassessment of emerging market fundamentals. Emerging market equities and currencies with significant valuation gains and local fixed-income markets where foreign investors concentrated positions corrected the most. But external debt markets show little concern about the possibility of a sovereign credit distress event. Nevertheless, policymakers in both mature and emerging markets face renewed challenges in ensuring balanced global growth and financial stability.

December, 2005 (pdf file 521kb): Since the release of the September 2005 Global Financial Stability Report, financial conditions in mature and emerging markets have remained favorable, supported by expectations for sustained and broadening global growth, still abundant liquidity, and a continuing investor search for yield. Nevertheless, risks to financial stability remain, especially as interest rate and credit cycles turn and global liquidity is withdrawn. Those emerging markets with structural vulnerabilities could be stressed. In mature markets, markets for leveraged credit instruments could act to amplify reaction to specific credit events, while sub-prime segments of the mortgage markets, particularly in the United States, may be exposed by a fall in housing prices. Global imbalances remain a risk that could lead to disorderly adjustment of financial asset prices even though this remains a low probability event given the robustness of capital flows into the United States.

June, 2005 (pdf file 491kb): Financial markets have produced some unexpected developments so far in 2005. The dollar has appreciated despite a growing U.S. current account deficit, and long-term interest rates have fallen despite increases in short-term policy rates. The decline in long-term yields reflects more moderate expectations for growth and inflation, as well as a shift in long-term investors' preferences towards fixed-income assets. With credit spreads in corporate and emerging debt markets at low levels, the search for yield is increasingly providing incentives for financial market participants to move out the credit spectrum towards riskier assets, and to try to enhance returns through use of complex financial instruments such as credit derivatives.

November, 2004 (pdf file 612kb): Low yields and low volatility have been the hallmarks of major financial markets throughout much of the year. This combination has encouraged investors to take risk, especially in the credit markets, leading to low credit spreads and a very receptive environment for new emerging market bond issuance. However, the combination of low short-term interest rates and low bond market volatility has encouraged leveraged positions in the credit markets, raising the risk that credit spreads have been unduly compressed. Moreover, increased concerns over the heavy reliance of the United States on continued capital inflows to finance its large external current account deficit have resulted in a decline of the dollar.

June, 2004 (pdf file 372kb): Changing expectations for the pace and timing of the U.S. tightening cycle have had a profound effect on global investor sentiment, positioning, asset prices, and credit spreads both this year and last. Since early 2004, the prospect of higher short-term interest rates has made investors more cautious and triggered deleveraging across a wide range of markets. This process has been orderly without posing a threat to financial stability or financial intermediaries.

May, 2003 (pdf file 367kb): Ample liquidity in main financial centers and improved market confidence spur rally in corporate and emerging market bonds through mid-May. Concerns about U.S. dollar overshooting and uncertain prospects for global growth pose risks. Emerging bond market has benefited from a global quest for yield that has compressed spreads to quite low levels. Primary issuance, however, has lagged earlier years. Rebound in global growth needed to sustain recent improvements in credit quality and financial strength.

November, 2003 (pdf file 411kb): Encouraged by abundant global liquidity, strong economic growth, low inflation, and the improving credit quality of borrowers in both mature and emerging markets, investors have increasingly favored riskier assets. As a result, credit spreads in mature and emerging markets have narrowed, the cost of default protection has fallen, global equity markets have rallied strongly since their trough in March, and equity market volatility is low. While stronger global growth and low risk-free interest rates are providing a positive external environment for emerging markets, continued inflows may push valuations to levels not fully justified by fundamentals.