Global financial conditions tightened abruptly due to COVID-19: IMF

The International Monetary Fund (IMF) in its Global Financial Stability Overview released on Tuesday has noted that early in 2020, global financial markets remained afloat as there was a sense of optimism on the back of supportive monetary policy, reduced trade tension and tentative signs of stabilisation in the global economy. However, the spread of COVID-19 has posed a risk that has seen the prices of risk assets and commodities fall at unprecedented speed.

The document released by the IMF says that the equity markets experienced the fastest drop in history with the S and P 500 falling 20 per cent from its peak in just 16 trading sessions.

The asset price declines reached about half the magnitude seen in 2008-09 at the worst point of the sell-off, and implied volatility spiked across asset classes, in some cases to levels last seen during the global financial crisis.

Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF, Tobias Adrian while releasing the document said: "The COVID-19 pandemic poses unprecedented health, economic, and financial stability challenges. The first priority is, of course, to save lives. But the necessary containment measures to limit the spread of the virus are causing a dramatic decline in economic activity."

"As a result, in only three months, the 2020 outlook has shifted from expected growth of more than 3 per cent globally to a sharp contraction of negative 3 per cent--much worse than the output loss seen during the 2008-09 global financial crisis. The ultimate impact of the crisis on the global economy, as well as the timing of a recovery, is highly uncertain," he added.

He also noted that "central banks have eased monetary policy and are providing liquidity to the financial system, including through foreign-currency swap lines, to maintain the flow of credit to the economy."

Meanwhile, speaking on financial supervisors, he said: "Supervisors are encouraging banks to prudently renegotiate loan terms for those struggling to service their debts in order to help bridge the period of economic inactivity, and to use existing capital and liquidity buffers, as well as other flexibility in their regulatory and accounting frameworks, to absorb losses.