Washington — The global financial crisis and concern about debt levels in many advanced economies showed no asset could be viewed as truly safe, the International Monetary Fund (IMF) said on Wednesday.
"Recent rating downgrades of sovereigns, previously considered virtually riskless, reaffirm that even highly rated assets are subject to risks," the IMF noted in a report released ahead of its and sibling agency the World Bank's spring meetings later this month.
The Washington-based IMF believed market distortions posed increasing challenges to the ability of safe assets to fulfil their pivotal role in global markets.
"Heightened uncertainty, regulatory reforms and the extraordinary post-crisis responses of central banks in the advanced economies have been driving up demand for safe assets," said the analytical chapters of the Global Financial Stability Report (GFSR).
On the supply side, fiscal concerns led to a decline in the perceived safety of sovereign debt. The IMF's analysis showed about US$9 trillion, or about 16% of the projected sovereign debt, could be taken out from safe asset supply by 2016.
The shrinking universe of safe assets and growing demand for such assets had negative implications for global financial stability, the IMF said.
"Policymakers need to strike a balance between the desire to ensure the soundness of financial institutions and the costs associated with potential overly rapid acquisitions of safe assets to meet such goals," it said.
The report proposes several approaches to mitigate the risk of financial instability, including the risk categorisation of eligible assets both in terms of creditworthiness and liquidity, appropriate risk-based haircuts and minimum criteria for inclusion of safe assets as collateral, and public strategies to lower debt levels and enhance economic growth prospects.
The IMF also said the growing capacity of emerging economies to issue their own safe assets via the improvement of domestic financial infrastructure would alleviate the imbalances in the global safe asset market.