IMF issues warning on potential liquidity shocks

Investors are borrowing money to buy shares on the US stockmarket at a torrid pace and are resorting to the same sorts of financial engineering that preceded the last two financial crises. "Margin debt as a percentage of market capitalisation remains higher than it was during the late-1990s stock market bubble. The increasing use of margin debt is occurring in an environment of declining liquidity. Lower market liquidity and higher market leverage in the US system increase the risk of minor shocks being propagated and amplified into sharp price corrections," said the IMF in its Global Financial Stability Report. The ratio of non-financial corporate debt to underlying assets has reached 27pc, even higher than it was just before the Lehman crash in 2008. This is becoming hazardous as the US Federal Reserve prepares to raise rates… The so-called 'flash crash' on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as "a powerful amplifier of financial stability risks." Read the full article (VIEW LINK)


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