Bloomberg News

Scarce Risk-Free Assets Could Hurt Stability, IMF Says

April 11, 2012

Greek police demonstrate in front of their occupied pension fund on March 7, 2012 against the participation of pension funds in an upcoming debt-swap deal between the Greek state and private bond holders. Photographer: Louisa Gouliamaki/AFP/Getty Images

Greek police demonstrate in front of their occupied pension fund on March 7, 2012 against the participation of pension funds in an upcoming debt-swap deal between the Greek state and private bond holders. Photographer: Louisa Gouliamaki/AFP/Getty Images

(Corrects title of report in second paragraph.)

Rising investor demand for so- called safe assets could potentially hurt global financial stability, the International Monetary Fund said in a report.

Growing demand will make safe assets less available, “increasing the price for safety in global markets,” the IMF said in a chapter of its Global Financial Stability Report released today. “The tightening market for safe assets can have considerable implications for global financial stability, including an uneven or disruptive pricing process for safety.”

The idea of “absolute safety” implied by credit-rating firms’ highest ratings “can lead to an erroneously high level of perceived safety,” the Washington-based IMF said. As investors try to find “scarce safe assets, they may be compelled to move down the safety scale, prompting the average investor to settle for assets that embed higher risks.”

In a separate chapter about the financial impact of people living longer, the IMF said “few governments or pension providers adequately recognize longevity risk.”

If the issue isn’t addressed soon, it “could have large negative effects on already weakened private- and public-sector balance sheets, making them more vulnerable to other shocks and potentially affecting financial stability,” according to the report.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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