The prices of risky assets have recovered due to the unprecedented measures taken by central banks. In its latest update to the World Financial Stability Report, the International Monetary Fund (IMF) welcomes easing of global financial conditions, particularly in May and June, after a “brutal” tightening in early year. “This easing was helped both by the significant drop in interest rates and by the sharp rebound in market values of risky assets,” said the IMF in its update entitled “Financial conditions have eased, but the risks of bankruptcy are very worrying ”. Despite this satisfaction, the Bretton Woods institution warns of the appearance of several vulnerabilities because of the pandemic. In both advanced and emerging countries, corporate and household debt could become unsustainable for some borrowers in the event of a severe economic contraction, worries the IMF. Likewise, insolvency situations will test the resilience of the banking sector, the Fund believes. “Some banks have already started to increase their provisions for expected loan losses, as evidenced by their first quarter profit and loss accounts. This trend is likely to continue as banks assess the ability of borrowers to repay their loans, “said the IMF.
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