Credit risk remains elevated and appetite for risk remains subdued, though the systemic risk to financial markets is not as elevated as it was in the spring, according to a new market update from the International Monetary Fund.

"Global financial markets continue to be fragile and indicators of systemic risk remain elevated," said the update to the Global Financial Stability Report on Monday.

The report said banks in the U.S., Europe, and Asia, have "generally been successful" in raising capital, although disclosed losses have so far exceeded capital raised, and banks continue to find it difficult to maintain earnings. The IMF noted interbank rates remain elevated and long-term funding costs have risen, despite help from emergency liquidity facilities.

The IMF said inflation risks place constraints on the scope of monetary policy, as private sector borrowing has declined even with numerous cuts to interest rates."In the first quarter of 2008, total U.S. private sector borrowing growth fell to 5.2%-a level last seen after the 2001 recession," the report said.

Looking at the U.S., the report said "a bottom for the housing market is not visible," while noting that a recovery in that sector is necessary for market stabilization. On the plus side, the report said recent developments in affordability "may provide support for house prices to stabilize."

The IMF supported the government bailout of Fannie Mae and Freddie Mac, arguing that the wide investor base in GSE debt and the reliance of mortgage lending on securitization meant that there could have been "systemic consequences" had confidence in GSE debt come into question.

The report said emerging markets "remain relatively resilient to the credit turmoil thus far," but noted that some emerging markets are "being tested" as they come under increased scrutiny due to rising inflationary pressures as well as tightened financial conditions in investor countries.

By Patrick McGee and edited by Cristina Markham