IMF warns of risk to world economy from 'panic selling'

A sudden slump in investor confidence could trigger "panic selling" and severe market turbulence, the International Monetary Fund warned yesterday.

In its quarterly review of financial stability, the IMF said it believed the world would remain immune from a systemic financial shock but warned there were "considerable downside risks".

It said some major financial institutions, especially European banks and insurers, could collapse under the weight of huge accumulated losses from the stock market fallout.

The IMF also warned a rise in risk aversion among investors could make it harder for riskier companies and emerging countries to obtain funding.

The report, unveiled in London, struck a cautiously optimistic note which will be echoed in its key economic outlook in a fortnight's time.

It said: "Looking ahead, and notwithstanding special political and economic problems in important emerging market countries, the most likely outcome is that financial resilience and stability will be maintained."

It said the economy was recovering, excessive share values were no longer a risk and there was little evidence of an imminent "credit crunch".

But it went on: "Nevertheless considerable downside risks remain in the immediate future."

It said the concern was that investors' trust and confidence eroded to a point that they would withdraw "en masse" from the markets. This could start a vicious cycle with markets plunging further and confidence falling to levels where low-risk borrowers would struggle to raise money. "This could create market conditions in which fear feeds on fear and panic selling occurs," it said.

At a conference to launch the paper, Gerd Hausler, the IMF's director of international capital markets, played down the likelihood of such a crisis. "I think the risk at this moment in time is limited ... but there is a residual risk that retail investors could liquidate their portfolios."

Mr Hausler said there was evidence risk aversion had started to hit low-risk companies, noting that discounts needed to get rights issues away were "steeper than at any time in recent history".