A correction is defined as a 10 percent or more decline in the price of an asset or index
The coronavirus pandemic is deepening the worldwide economic crisis with no sign of improvement while banks are in loan spree in a bid to pull up dull businesses.
Against such backdrop, the International Monetary Fund (IMF) has warned that easing of financial conditions going against the real economy could lead to a fresh trouble.
The update of Global Financial Stability report published by the Fund Thursday said that the ongoing disconnect between financial markets and the real economy could lead to a correction in asset prices.
There are no proper connection between financial markets and the real economy amid huge uncertainties in the pandemic, which arises vulnerability that could pose a threat to the recovery, said the report.
The report has identified some other vulnerabilities in the financial system due to Covid-19 as high levels of debt may become unmanageable for some borrowers. The losses resulting from insolvencies could hamper resilience of banks in some countries.
The IMF assumes refinancing risks for some emerging and frontier market economies. The agency also worried about drying up monetary market in some countries.
The report has said, global financial conditions have eased significantly in the last two months following the sharp tightening early in the year.
This easing has been driven by the combination of a marked fall in interest rates and a strong rebound in risk asset market valuations.
Bond issuance has surged for higher-rated borrowers, and markets have reopened for speculative-grade borrowers as well.
Investor sentiment toward emerging market economies has also improved notably. They continue to differentiate across emerging and frontier economies, with some inflows of capital into selected countries and asset classes.
Higher rated countries have also been able to issue hard currency debt at a historically high pace so far this year, faster than economies with lower credit ratings. This difference underscores the external pressures that some emerging market economies are still facing.
Actions by central banks have boosted investor risk appetite. Policy rates in a number of countries have been cut further and investors expect interest rates to remain at very low levels for several years.
Fiscal and financial policy measures have also helped support investor sentiment said the report and explained governments around the world have provided large emergency lifelines to people and firms amounting to near $11 trillion.
Financial authorities have also bolstered market confidence through a series of policies, said the report.
The IMF recommends all of the central banks to use conventional and unconventional tools to support the flow of credit hedging the inflation and financial stability.
Central banks should carefully assess which markets are critical for maintaining financial stability and design support programs to minimize moral hazard and risks to themselves, said the report.
The report recommended the governments of the emerging market and developing economies to use flexible exchange rates to absorb external pressures.
Whatever, the IMF has projected the global economy to shrink by 4.9 percent in 2020, which is 1.9 percentage points below the April 2020 World Economic Outlook forecast.