KEY POINTS:
LONDON - The International Monetary Fund sent shudders through financial markets on Tuesday, warning that America's sub-prime mortgage crisis could deepen and spread to other markets.
In its biannual Global Financial Stability Report, the Washington-based lender identified the sub-prime market, which specialises in lending to borrowers with patchy credit records, as one of the main threats to an otherwise sturdy financial outlook.
Other risks included debt-laden private-equity buyouts, risky capital inflows to emerging markets and persistent global economic imbalances.
"The deterioration in the US sub-prime market has been more rapid than expected at this point in the cycle, and the fallout ... could yet spread to other market segments," the report said.
In particular, the IMF said the looser credit standards may have gone beyond the sub-prime sector into portions of the so-called "Alt-A" mortgages, the next riskiest area.
And there could be losses in other consumer credit markets, including credit card and sub-prime auto loans asset-backed securities, held by a variety of global investors, it said.
The warning comes a week after New Century, America's second-biggest player, collapsed into bankruptcy.
The credit-rating agency S& P's said the UK sub-prime mortgage market was showing "signs of stress".
The IMF also flagged up the risks associated with loading up private-equity buyout targets with debt, making them vulnerable to economic shocks.
The report, published on the eve of the IMF's spring meetings at which the world's most powerful finance ministers - including Gordon Brown - will discuss the state of the global economy, also warned that financial markets had become so accustomed to low risk and low volatility that they were in danger of becoming complacent, a point illustrated by the popularity of the carry trade.
The yen carry trade - where investors borrow yen at rock-bottom interest rates to invest in high-yielding assets overseas - drove the Japanese currency to a record low of 160.12 against the euro yesterday.
- INDEPENDENT
