(Yicai Global) Oct. 17 -- The International Monetary Fund is concerned that easy monetary conditions may fuel long-term financial risks, though they may ease immediate concerns, and a resurgence of the 2008 financial crisis is possible once a severe economic recession sets in, the Washington, DC-based intergovernmental economic watchdog warned in the biannual Global Financial Stability Report it released yesterday.

The organization also anticipates a longer-than-expected low interest environment worldwide as the US, Eurozone and other economies open up rate cut channels in succession, suggesting negative yields for about USD15 trillion worth of outstanding debt.

Compared with the report it unveiled in April, the latest edition more greatly highlights the negative impact on the economy of trade disputes, and projects a further weakening of global business confidence and growing downside risks to the world economy.

"Since the last edition of the GFSR in April, global financial markets have been buffeted by the twists and turns of trade tensions and significant policy uncertainty. A deterioration in business sentiment, weakening economic activity, and intensifying downside risks to the outlook have prompted central banks across the globe, including the European Central Bank and the Federal Reserve, to ease policy," the report cautioned.

Trade tensions and policy uncertainties are major driving forces of downside risks to the global economy, the report concluded. Policymakers should therefore prioritize solving trade disputes, defining economic policies and developing and deploying macroprudential instruments to cope with rising financial fragility.

Lower government bond yields have further contributed to the easing of global financial conditions compared with six months ago, particularly in the US and the euro area, the report explained, adding that, though an easier financing environment may support economic growth and help contain downside risks in the near-term economic outlook, it also fuels greater financial risks and further increases the fragility of the financial system, thus imperiling medium-term economic growth.

Rising fragility is already visible in the corporate and non-bank financial sectors of some major economies. Extremely low interest rates are forcing insurance companies, pension funds and other institutional investors to turn to riskier, less liquid assets to generate targeted returns.

These investors have become the largest source of capital for non-financial companies, a situation which in turn drives increases in corporate debt. The proportion of debt owed by companies with weaker solvency is already considerable, the report found, and if a recession besets the economy, it could reach the same level as in the last global financial crisis.

Editor: Ben Armour