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IMF warns on growing risks in financial markets

IMF chief Rodrigo Rato yesterday warned that some investors are rushing with 'reckless disregard' into increasingly risky assets around the globe and may be in for a shock if things go sour.

„I am concerned about attitudes to risk in some areas of the financial markets,” the International Monetary Fund managing director said, according to the prepared text of a speech in Toronto. Rato said that capital flows into emerging markets, for example, are beneficial, but that some investors may be ignoring the high risks these investments may face. In particular, he said he was worried that a shift in monetary policy in major economies will change investors’ willingness to take on risk and, if so, how this will play out in the markets. „On the face of it, there appears to be a greater willingness to take risks in financial markets, motivated in part by the search for yield and in part by greater ease in transferring risk,” he said. „However, I am less concerned about a general shift in risk preferences than I am about places where markets still seem complacent about risk,” he added.

He said some lenders may also have become complacent about credit risk because of the rapid rise of risk-transfer markets. „We know credit risk is being transferred, but it is often not clear who it is being transferred to, or whether the ultimate holders of these risks fully understand them and can manage them prudently,” he added. He pointed to the overconfidence of some market players: „This may reflect not so much a conscious decision to take risks as an underestimation of the extent of risks by some market participants and a reckless disregard of risks by others.” He offered the example of the proliferation of high-risk, or supreme, mortgage loans in the US housing sector during a housing boom in recent years that collapsed over a year ago.

The IMF called on central banks to scrutinize inflation risks more closely. „The global economy is now in a position where pre-emptive action to contain inflation risks may be particularly important,” he said. Rato also expressed concern about the substantial flows of capital into some emerging countries, saying although they were welcome, „they also expose the countries concerned to an abrupt reversal of flows when sudden shocks occur.” He said the US economy was likely to regain momentum as the drag from the current housing correction and softness in the business sector eases. Rato said the situation in the US housing market was „more ambiguous” but added that the effects from problems in the supreme mortgage market appeared to be limited. „We believe that the US economic prospects are good,” Rato said. The IMF chief also called for greater scrutiny by regulators of hedge funds and risks related to the dramatic growth in large private equity buyouts, which are being financed by a rising proportion of debt. (gulf-times.com)