Sovereign Risks Could Undermine Stability Warns IMF
The International Monetary Fund said that the health of the global financial system has improved but that recovery in the global economy is still fragile. The IMF also said that investor concerns over public debt could undermine recent gains in stability. The IMF also said that Greece is a special case and should not be compared with other Euro Zone nations. In it’s Global Financial Stability Report the IMF said, “Advanced country sovereign risks could undermine stability gains and take the credit crisis into a new phase.” The IMF said there is a possibility that deteriorating sovereign credit could infect domestic banking systems and affect the real economy creating another credit crisis.
Accumulation of Public Debt ‘Significant’
The IMF is concerned that investor demand for high rates will drive up borrowing costs for the private and public sectors. The director of the IMF’s monetary and capital markets department pointed out that a new crisis is not imminent. Director Jose Vinals stated, “We’re saying that as a result of the crisis, the accumulation of public debt has been significant and there is concern now in the market with sovereign risk.” Vinals dismissed concerns that Greece’s debt crisis could spread to other euro zone nations such as Spain and Portugal. Vinals further stated, “Greece is a special case and we can’t say other countries are in that situation. These other countries have solid fiscal institutions and don’t have the fiscal uncertainties that Greece had. Greece is a wakeup call, basically saying that in some extreme cases, such as Greece, this could lead to serious problems.”
Some Banking Sectors Poorly Capitalized
The IMF reduced its estimates of global bank write downs from $2.8 trillion to $2.3 trillion reflecting improvement in the global economy. Previous estimates a year ago had been as high as $4 trillion. The $4 trillion figure included insurance company losses and was made when stocks and other assets were flat. Asset prices have risen since then enabling banks to recoup earlier losses. In the US estimates for loan write downs for 2007-2010 were reduced to $588 billion. The IMF warned that mortgage delinquencies and foreclosures will rise as unemployment continues. Euro Zone bank write downs were reduced to $443 billion due to improvements in growth and employment. The IMF warned that although most banks are now adequately capitalized, some banking sectors remain poorly capitalized because of commercial real estate losses. The IMF report said that banks face more stringent regulations that may require them to raise more capital to make balance sheets less subject to risk.
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