IMF Managing Director Kristalina Georgieva warned central banks against restricting growth, stating that they could do so by tightening monetary policy too soon. She said that the global economy can still recover quickly from the shock of the Middle East war if the conflict ends in the coming weeks, but the situation will be worse if it continues throughout the summer. Georgieva explained that the IMF is holding talks with countries severely affected by rising energy prices and disrupted supply chains to discuss their financial needs. She emphasized that financial assistance to mitigate the effects of high energy prices should be limited and temporary, and authorities should avoid injecting money indiscriminately. «If the war ends within two weeks, we will see a rapid recovery of the global economy,» she said. However, she added, «if the disruption continues through the summer, we will be in an unfavorable position,» noting that «20% of oil and gas supplies are still missing from the global economy.» In its semi-annual Global Financial Stability Report, the IMF warned that the war in the Middle East is exacerbating global financial stability risks through inflationary pressures that could make financial markets more cautious, straining non-bank institutions, private credit firms, and borrowers in the artificial intelligence sector. The report noted that global stock prices have fallen 8% since February, while sovereign bond yields have risen sharply, driven by higher energy prices and market expectations of rising inflation. The war, which led Iran to close the Strait of Hormuz, has caused a sharp rise in oil prices. Market volatility for bonds has been exacerbated by high levels of debt-to-GDP and an increase in short-term securities issuance, which are more vulnerable to rollover risks during periods of high inflation. The IMF stated that this could lead to a tightening in financial markets, which has caused broader disruptions in the past. The Fund warned, «Markets have corrected in an orderly manner so far, but the risks are not symmetric. The longer the conflict drags on, the greater the risk of a more severe tightening of global financial conditions, which were very favorable before the war.» The report added that there are several channels through which financial pressures could exacerbate financial instability. The IMF warned that sharp losses on sovereign bonds could weaken bank balance sheets and limit the ability of governments to support troubled banks. The Fund also cautioned that a sudden tightening of financial conditions could force a wave of selling from non-bank institutions, option sellers, and other highly leveraged investors, such as hedge funds and leveraged exchange-traded funds, leading to massive losses. The IMF noted that hedge funds' exposure to interest rate and sovereign derivatives has more than doubled since 2020, reaching over $18 trillion by 2025. Tobias Adrian, director of the IMF's Monetary and Capital Markets Department, said, «Vulnerabilities are only revealed when there is a shock, and the war in the Middle East is the shock unfolding before us.» The IMF also warned that a prolonged conflict in the Middle East could lead to a significant slowdown in investments in artificial intelligence, a key driver of growth.
