Increasing defaults on subprime loans in the United States could spread to other markets and sectors of the US economy, the head of the International Monetary Fund warned on Friday.
IMF Managing Director Rodrigo Rato, in remarks prepared for a speech at the University of Pennsylvania, said this was one of three risks developing in financial markets that could affect the global economy, although he reaffirmed that global economic fundamentals are currently strong.
Among risks, the IMF chief also pointed to the large increase in private equity buy-outs financed by a bigger proportion of debt. If these deals turn sour, it could trigger a reappraisal of risk, which could ultimately lead to a tightening of credit for other corporate borrowers, he added. "This could adversely affect investment and growth prospects," Rato said.