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The IMF report said this U.S. strength should help shore up global financial stability. Yet managing a smooth transition out of the extraordinary bond purchases "could prove challenging" as both interest rates and market volatility rise. "This process will be unprecedented and complex," said Vinals, who also noted that long-term market interest rates have already begun to rise in anticipation of the tapering. Higher interest rates could put a dent in the U.S. economic recovery. The report said one potential danger to greater global financial stability is the possibility that long-term interest rates could rise more sharply than anticipated. In one of the report's recommendations of policies to enhance global financial stability, it urged the Federal Reserve to clearly communicate its intentions on tapering the stimulus. It also urged Europe to move forward on a banking union -- a single body that would restructure or unwind failed banks across the region. The "stressed economies" of Italy, Portugal and Spain continue to be plagued by heavy corporate debt loads, the report said. A significant share of the corporate debt in stressed economies is now owed by companies with weak debt servicing capacity and this could negatively affect bank balance sheets and cut into profits, it added. It said Europe needs to improve credit to viable enterprises. The report noted that many policymakers see weak credit growth generally in the global economy as a primary reason behind the slow economic recovery. Developing countries saw a larger than normal surge in bond investments over the past five years, said Vinals. And they are already seeing significant capital flows out as interest rates rise in the U.S. and attract investment. Highlighting one risk to global financial stability, these outflows could increase significantly along with volatility. Financial authorities may need to intervene to ensure the process is smooth, the IMF report said.
[Associated
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