The IMF called the main risk to the global financial system

Rising government bond yields are the most serious risk to the global financial system. This was stated by Bloomberg News Deputy Director of the Department of monetary systems and capital markets of the International monetary Fund (IMF) Afanasios Vamvakidis.

"Other risks and vulnerabilities have also worsened," he added. For example, the possibility of a “market correction” in artificial intelligence (AI) could have broader implications. However, the risk associated with a sharp rise in government bond yields is seen as a more immediate threat.

The cost of borrowing for the U.S., European and Japanese governments has risen to its highest levels in decades as conflict in the Middle East drives up inflation and central banks respond by raising interest rates. Investors fear that the combination of historically high debt load and now higher refinancing costs will further increase the burden on government budgets.

Many governments have accumulated debt since the 2008 financial crisis, including during a pandemic in 2020 when borrowing was cheap.

“If you think about the last couple of decades, the situation looks exceptional,” Vamvakidis commented on the rate dynamics, as a result of which the yield of the 10-year benchmark bonds of France rose to almost 5% per annum, and in some other EU countries exceeded the mark of 4%. In the United States, long-term government bond yields have peaked since the early 2000s, and in Japan since the mid-1990s.

According to the IMF’s risk panel, the risk of a market correction caused by AI is about the same as it was six months ago. “There is a contradictory dynamic here,” said Jason Wu, deputy director of the IMF’s Global Markets Analysis Unit.

According to him, on the one hand, stock valuations are slightly lower due to high corporate profits, on the other hand, there is an increase in leverage in the AI ecosystem.

The IMF also analyzed stock markets with the highest direct exposure to AI-related risks. Korea and Japan are among the most vulnerable, while in most other regions of the world this vulnerability is reduced due to rising share prices of other companies.

Containing excessive leverage to increase potential profits in the AI ecosystem should be a priority. The fund recommends limiting lending to investors seeking to invest in AI, as well as increasing capital requirements for relevant bank loans.

In addition, regulators should assess the likelihood of systemic losses associated with AI investments, including the risk that high connectivity and cyclical financing schemes exacerbate the crisis.

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