IMF warns of worryingly high liquidity risks

The International Monetary Fund is watching for potential market liquidity risks as countries refinance debt issued during the pandemic, according to its No. 2 official. 

Gita Gopinath, first deputy managing director at the Washington-based fund, told Bloomberg Television’s Francine Lacqua on Wednesday in Davos that she views such dangers as concentrated rather than systemic. 

“This year, we are more worried about liquidity problems,” she said. “Many countries borrowed a lot during the pandemic. That was short term in nature, and that’s coming due, so I think liquidity risks are something we should pay attention to.”

The Covid-19 pandemic and the energy crisis following Russia’s invasion of Ukraine prompted looser fiscal policy in many countries as governments spent to cushion populations from the worst of their effects. Now, governments are contending with a legacy of borrowing and high interest rates aimed at taming inflation.

“Debt is at extremely high levels,” Gopinath said. “What worries me on top of that is that we have projected fiscal deficits that are going to be higher than they were pre-pandemic.”

There’s also a consequence of continuing fiscal expansion in Washington that has implications far and wide, she said.

 “The US doesn’t have a sustainability problem, obviously, it’s one of the safe asset producers, but when you put that much of US bonds on the market, it can crowd out other kinds of funding around the world,” she said. “That has implications for the developing world.”