Turmoil in global credit and money markets will likely continue as investors worry about the size of financial losses and where they might arise, the International Monetary Fund said on Monday.

The lender also warned that a more severe tightening in credit conditions could not be ruled out, which could worsen the U.S. housing slowdown as borrowers encounter fewer refinancing options.

The impact of the current global credit crunch, which began in August with rising defaults in the U.S. subprime mortgage market, will likely slow the global economic expansion, the IMF said in its twice-yearly Global Financial Stability Report.

"The global financial system has undergone an important test and the test is not over yet. Implications of this period of turbulence will be significant and far-reaching," Jaime Caruana, IMF director for monetary and capital markets departments, told a news conference.

The report pointed to future dangers for markets and investment firms.

"The period ahead may be difficult as bouts of turbulence are likely to recur and the adjustment process will take time. Uncertainty regarding overall losses and exposure has raised market and liquidity risks, with potentially broader implications for financial institution," he added.

"Credit conditions are not likely to normalize soon and the adjustment process may be protracted and may affect not only prices but also availability of credit," it added.


IMF Managing Director Rodrigo Rato said the impact on global growth from the credit crunch and re-pricing in credit markets will be felt in 2008 and that the United States will most likely be hardest hit.

He said world economic growth should remain strong next year but looked set to be below the levels of 2006 and 2007. Downside risks increased the longer financial markets remained in crisis, Rato told a seminar in Madrid.

Meanwhile, Caruana said emerging markets had weathered the current market storm well so far thanks to improved economic management and accumulation of reserves. Still, policy-makers needed to keep a close eye on the situation especially in countries where foreign borrowing has supported rapid credit growth.

The IMF added: "Generally benign emerging market banking system default risk indicators continue to reflect market perceptions of healthy capitalization and profitability, as well as diverse earnings sources and sound asset quality."

The IMF said the rapid spread of problems from U.S. subprime mortgages to other markets surprised investors and government policy-makers.

Caruana said it was too early to draw definitive policy conclusions while markets dealt with the credit market problems. But closer scrutiny was needed of new financial instruments, such as securitization and structured products, that may have contributed to more relaxed credit standards.

He said links between systemically important financial institutions, such as credit rating agencies, and off-balance sheet vehicles also needed to be examined.

"To strengthen the financial system against future strains it will be important to draw lessons about the market practices that need to change and the regulatory frameworks that need to be revised," he said.

"Some of the practices that have developed in the structured credit markets will have to change," he added.