Global Financial Stability Update: The IMF (International Monetary Fund) says in an update of its April report on the global financial system that the Eurozone countries struggling with high public debt, known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain) will have to refinance €300bn in maturing bonds in H2 2010.

The Fund says that"sovereign risks in parts of the euro area are threatening to spill over to other regions and re-establish an adverse feedback loop with the economy. It says further decisive follow-up is needed to the significant national and supranational policy responses that have been taken in order to strengthen confidence in the financial system and ensure continuation of the economic recovery."

The Update says public bond market pressures reflect significant rollover needs. Those countries in the Eurozone currently experiencing significantly widened spreads to German bunds need to refinance about €300bn in debt maturing in the third and fourth quarters of this year (Figure 3 above). In doing so they will face competition from the very large rollover needs of the United States, United Kingdom, Japan, and other Eurozone countries amounting to a total of about $4trn maturing in the third and fourth quarters.

The IMF says banks are also confronted by significant funding pressures coming from maturing bonds. As was emphasized in the April 2010 report, the Fund says banks face a wall of maturities in the next few years, especially in the Eurozone, and the recent turbulence has at least temporarily dampened the primary market for financial institutions’ bond issuance.

The Update says bank funding pressures may accelerate the ongoing deleveraging process. It is too early to tell if actual bank lending growth will worsen in the Eurozone, after recently stabilizing at barely positive year-on-year rates. Early indications suggest that Eurozone banks’ lending standards have somewhat reversed their downward trend, tightening again.

The Fund says in addition to the potential adverse impact on bank lending, the recent market turbulence and widening in credit spreads has corresponded with a collapse in nonfinancial corporate bond issuance in May. In spite of a recent rebound in June, issuance from European firms was especially anemic, and smaller than in the period surrounding the Lehman bankruptcy. If these tighter conditions continue, they could begin to have a significant impact on the availability of credit to corporates.

The Update concludes that recent global stability gains are threatened by a confluence of sovereign and banking risks in the Eurozone that, without continued and concerted attention, could spill over to other regions. Rapid implementation of the important and appropriate decisions taken by the Eurozone governmental authorities will be a key component in calming financial markets. Further credible and swift action is needed to stabilize financial institutions. The Fund says consolidation of financial stability will be important to keep the economic recovery on track.

Global Financial Stability Report Update