By David Lawder
WASHINGTON, April 5 (Reuters) - Rising geopolitical
tensions and the resulting fragmentation of the global economy
could increase financial stability risks, reducing cross-border
investments, asset prices, payment systems and banks' ability
to lend, the International Monetary Fund said on Wednesday.
The IMF has long warned of increased costs, economic
friction and GDP output losses associated with the global
economy fragmenting into geopolitical blocs, with U.S.-led
democracies on one side and China and other autocratic states on
another. This can lead to competing technology systems and
reduced trade.
But a new IMF working paper highlighted the potential for
rising tensions to drive outflows of cross-border capital,
including direct investment, from countries, with particularly
high risks for developing and emerging market economies.
Such7 stability risks are driven through financial channels,
IMF researchers said in the paper, prepared for next week's IMF
and World Bank spring meeting as part of the Global Financial
Stability Report.
Financial stability is expected to be a major topic at the
meetings after recent banking system turmoil, marked by the
failures of Silicon Valley Bank and Signature Bank in the U.S.
and Switzerland's forced sale of Credit Suisse to rival UBS .
The paper cited research using the U.S.-China divergence in
UN Security Council voting since 2016 as a proxy for rising
geopolitical tension between an investing and a recipient
country. Such tension reduces cross-border portfolio investment
and banking claims by 15% in the recipient, it said.
"Imposition of financial restrictions, increased
uncertainty, and cross-border credit and investment outflows
triggered by an escalation of tensions could increase banks'
debt rollover risks and funding costs," the IMF researchers said
in an accompanying blog post.
"It could also drive up interest rates on government bonds,
reducing the values of banks' assets and adding to their funding
costs."
This, in turn could lead to banks cutting lending, reducing
economic growth in the real economy and feeding back into more
financial instability, the fund said.
To curb the risk of potentially destabilizing fallout from
geopolitical events, the IMF said banking supervisors,
regulators and financial institutions should use stress tests
and scenario analysis to better understand how rising tensions
could be transmitted to the financial system.
It said policy makers should strengthen crisis management
frameworks by ensuring cooperative arrangements between national
and regional authorities. Countries also should strengthen
regional safety nets, through currency swap lines or
precautionary credit lines from international financial
institutions such as the IMF.
Economies also reliant on external financing should build
stronger buffers of international reserves, capital and
liquidity buffers at financial institutions, the paper said.
(Reporting by David Lawder; Editing by Richard Chang)
david.lawder.thomsonreuters.com@reuters.net))
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