(Xinhua)
Updated: 2007-09-24 23:36

WASHINGTON -- Global markets are likely to go through a protracted adjustment period following recent financial turbulence triggered by the collapse of the US subprime mortgage market, the International Monetary Fund (IMF) said Monday.

"Downside risks have increased significantly and even if those risks fail to materialize, the implications of this period of turbulence will be significant and far-reaching," the IMF said in its latest Global Financial Stability Report (GFSR).

The turbulence represents the first significant test of innovative financial instruments and markets used to distribute credit risks through the global financial system, with markets recognizing the extent to which credit discipline has deteriorated in recent years, said the report.

The crisis "has caused a repricing of credit risk and a retrenchment from risky assets that, combined with increased complexity and illiquidity, has led to disruptions in core funding markets and increased market turbulence in August," the report added.

Central banks in several countries have stepped in to help stabilize markets and mitigate the impact on the broader economy. But the GFSR said the period ahead may still be difficult as bouts of turbulence are likely to recur and the adjustment process will take time.

"Credit conditions may not normalize soon, and some of the practices that have developed in the structured credit markets will have to change," it stated.

The report, prepared by the IMF's Monetary and Capital Markets Department twice a year, said the turbulence could impact global economic growth.

"Although the dislocations, especially to short-term funding markets, have been large, and in some cases unexpected, the event hit during a period of above-average global growth. Our assessment is that credit losses and the liquidity constriction experienced to date will (nevertheless) likely slow the global expansion," it stated. The IMF will give its next forecast for world growth on October 17.

The GFSR noted that systemically important financial institutions began this episode with adequate capital to absorb the likely level of credit losses.

"Corporations, have, for the most part, been able to secure the financing they need to maintain their operations. However, the adjustment period is continuing and if the intermediation process stalls and financial conditions deteriorate further, the global financial sector and real economy could experience more serious negative repercussions," the report added.