SOVEREIGN DEBT risk in Europe and continued real estate woes in the United States have dealt a setback to global financial stability in the past six months, the IMF said yesterday.
The IMF said risks to the financial sector could be reduced if legacy problem assets were cleaned up, if governments improved their fiscal positions and if more clarity were provided on global financial regulation.
However, it warned again that governments risk a currency war if they try to use exchange rates to solve domestic problems.
“We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side,” IMF managing director Dominique Strauss-Kahn said. “I don’t think that is a good solution.”
Mr Strauss-Kahn was speaking ahead of the annual meetings of the IMF and World Bank in Washington this weekend.
In its semi-annual Global Financial Stability Report published yesterday, the IMF said: “The global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery. The recent turmoil in sovereign debt markets in Europe highlighted increased vulnerabilities of bank and sovereign balance sheets arising from the crisis,” the fund said.
Jose Vinals, of the IMF, said recent volatility in currency markets was not a major concern for global financial stability as long as the changes “move in the direction of medium-term fundamentals. The best way of protecting against any unintended consequences of foreign exchange rate changes on financial balance sheets is to have sound buffers to accommodate whatever changes happen,” he added.
The IMF said it trimmed its estimate of total global bank write-downs related to the financial crisis between 2007 and 2010 to $2.2 trillion from its April estimate of $2.3 trillion, largely on a drop in securities losses.
Banks have recognised more than three-quarters of these write-offs, leaving about $550 billion still to be taken. However, the fund said banks had made less progress in dealing with near-term funding pressures – nearly $4 trillion of bank debt needs to be refinanced in the next 24 months.
“Overall, bank balance sheets need to be further bolstered to ensure financial stability against funding shocks and to prevent adverse feedback loops with the real economy,” the IMF said.
The forceful policy response to the European debt crisis in April and May of this year helped to offset market and liquidity risks to banks.
However, the sector’s stability in the region remains vulnerable to potential market shocks, the IMF said. – (Reuters/Financial Times Limited 2010)
