Washington - The conflict in Ukraine can lead to a repricing of risk and cause a “disorderly tightening of global financial conditions,” the International Monetary Fund (IMF) said in its Global Stability Financial Report on Tuesday.
“Russia’s invasion of Ukraine could cause a sudden repricing of risk and a disorderly tightening of global financial conditions,” the report said. “Such an adverse shock, combined with the inherent vulnerability of OEFs (open-end investment funds) holding illiquid assets but offering daily redemptions, could trigger further outflows from these funds and amplify stress in asset markets.”
The IMF warned that disorderly tightening of financial conditions could trigger significant redemptions from these funds and contribute to additional stress in asset markets.
To prevent such an outcome, the IMF is calling on policymakers to ensure that adequate liquidity management tools are used by the funds, the report said.
“A wide range of tools is available to potentially mitigate the vulnerabilities and systemic impact of open-end funds, but effective implementation of these tools is lacking,” the report said.
The IMF noted that emerging markets would be the most vulnerable in such a situation because fund-level vulnerabilities in advanced economies tend to spill over to asset prices in emerging areas.
An adverse shock can create a vicious circle, particularly for less liquid funds, whereby investor redemptions force funds to liquidate portfolios, generating selling pressures that reduce the market value of securities and lead to further redemptions, the report said.
The IMF is thus urging governments to take policy actions to lower the risks related to open-end investment funds.
“A wide range of liquidity management tools is available that could potentially mitigate the vulnerabilities associated with OEFs and reduce their systemic impact, but effective implementation of these tools is lacking,” the report added.