Global Financial Stability Report

World Economic and Financial Surveys
Global Financial Stability Report Market Developments and Issues
April 2007, International Monetary Fund (IMF)

Since leveraged buyouts often use excessive amounts of debt and do so without transparency, they pose a risk to the global economy, according to a recent report by the IMF.

A recent Bangkok Post article on the potential impact of private equity on unions and the travel industry in Thailand, dealt with these issues.

Besides leveraged buyouts, the report deals with the more general issue of international capital flows and the risks they may pose. The gist of the report:

"Although emerging market fundamentals continue to improve overall, rapid capital flows into some emerging market countries could pose challenges for financial stability," the IMF said.

The report argued that investors may not be giving sufficient weight to downside risks leaving markets vulnerable to the possibility of a shock. The risks are being amplified by the increased linkages across financial products and markets, it said.

"Capital inflows to some emerging markets have risen rapidly, in part reflecting improved economic fundamentals... there is also a search for yield given low interest rates in mature markets," IMF said.

The shift to private sector flows, especially bank-based and portfolio flows suggests foreign investors are taking on more risk.

This can pose challenges for the authorities of some recipient countries with large current account deficits, especially if capital flows were to reverse.

While risks associated with abrupt unwinding of global imbalances have declined since September, 2006, they are still a concern. (Source: Economic Times India)