Easing monetary and financial conditions have fueled a steep rise in debt, with an increasing risk to market stability, the IMF’s Financial Counselor Tobias Adrian said Tueday (October 12) in Washington, DC.

“As countries were fighting the pandemic, they eased monetary policy, they expanded fiscal expenditures and as a result, debt in the corporate sector, debt among governments and in some countries in household sectors has increased tremendously. So high leverage is one vulnerability,” Adrian told reporters at the press conference for the Global Financial Stability Report.

Risk asset prices have rebounded following the precipitous fall at the beginning of the pandemic, while benchmark interest rates have remained at or near zero levels, leading to an overall easing of financial conditions.

“Easy monetary policy means that financial conditions ease, interest rates allow and risk asset prices are rising. However, we do detect stretched asset valuations in some segments and those could revert,” Adrian warned.

Tightening monetary conditions could lead to a squeeze on more vulnerable or stretched borrowers among the international community, the report noted.

“Emerging markets and developing economies have benefited tremendously from the ease of financial conditions. They have been able to access capital markets throughout the crisis. But there’s a risk of a sharp reversal of capital flows to those countries,” said Tobias.

He pointed in particular to the spectacular volatility in the crypto market in which assets like Bitcoin have fueled steep rises and falls in valuation on trade speculation.

“Crypto valuations have risen more than tenfold in just over two years. And crypto valuations are highly volatile. Just this year, we have seen run ups, declines and run ups associated with leverage in this important space. So we are taking a very deep look at the crypto ecosystem, and we’re developing policy formulations for countries around the world,” he said in a virtual news conference.

Some of the pressure on central banks has been ratcheted up as supply chain issues have caused a rise in inflation, the report noted.

“Some of the increases in prices in particular, and commodities have been higher and more persistent than what we had initially anticipated. And so while we continue to forecast that inflation is a temporary phenomenon with a reversion back to target in the vast majority of countries, they are certainly quite a bit of upside-risk going forward to both the level and the persistence of inflation,” Adrian added.

The full report is available at Global Financial Stability Report (imf.org)