The policies of US President Donald Trump could threaten the stability of the global financial system, according to the International Monetary Fund (IMF).
Policy uncertainty surrounding the US and other economies has introduced new threats to the functioning of the world markets, the IMF said in a report on global financial stability.
The report said: “In the United States, if the anticipated tax reforms and deregulation deliver paths for growth and debt that are less benign than expected, risk premiums and volatility could rise sharply, undermining financial stability.”
Markets around the world have seen massive upheavals since the election of Trump as President last November, with investors rushing to gain exposure to the effects of policies such as promised tax cuts and a trillion-dollar fiscal spending plan.
The IMF welcomed plans which would boost corporate investment, one of the key drivers of growth. The plans have driven US stock markets to record highs.
However, equity markets and the US dollar have lost some of their gains since November in recent weeks as investors take a more sceptical view of Trump’s ability to keep to his election campaign promises.
Confidence was dented by the White House’s failure to pass reforms to the US healthcare system, a signature pledge during the election campaign.
The IMF said: “So far, markets have taken a relatively benign view of these downside risks, suggesting the potential for a swift repricing of risks in the event of policy disappointment.”
Meanwhile the IMF said some of Trump’s avowed policies could harm financial stability. Reforms could boost risk-taking and raise leverage levels still further from already high levels, the IMF said.
The assets of firms unsuited to higher debt levels could rise to “nearly $4 trillion, or almost a quarter of corporate assets considered”, it said, leaving them vulnerable if conditions suddenly worsen.
The Washington-based body also urged the US administration not to pursue a “race to the bottom” when it comes to deregulation of the financial sector, including rolling back the Dodd-Frank banking regulations.
“Caution is needed when considering any future regulatory rollback. While regulation is never costless, neither is its removal; weakening regulatory standards comes at the cost of higher financial stability risks.”