| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy

RSS FEED


How to use our RSS feed

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Content Management by interactivetools.com.

News : Global Economy Last Updated: Oct 6, 2010 - 12:01:48 PM


IMF says the financial sector is the 'Achilles' Heel' of the global recovery
By Finfacts Team
Oct 5, 2010 - 3:56:13 PM

Email this article
 Printer friendly page

The International Monetary Fund (IMF) said today that the financial sector remains the 'Achilles’ heel' of the economic recovery

The Fund published its latest Global Financial Stability Report today and it said that its baseline scenario is for a gradual improvement in financial stability as the ongoing economic recovery continues but substantial downside risks remain. But without further bolstering of balance sheets, banking systems remain susceptible to funding shocks that could intensify deleveraging pressures and place a further drag on public finances and the recovery.

Sovereign risks remain elevated as markets continue to focus on high public debt burdens, unfavourable growth dynamics, and linkages to the banking system while policy actions need to be intensified to contain risks in advanced and emerging economies, tackle the legacy challenges of the crisis for the banking system, and put in place a new regulatory and institutional landscape to ensure financial stability.

The IMF said overall progress toward global financial stability has suffered a setback since the April 2010 GFSR as illustrated in its assessment of risks and conditions. The turmoil in sovereign debt markets in Europe highlighted increased vulnerabilities of bank and sovereign balance sheets and has served as a stark reminder of the close linkages between the two, as well as the potential for cross-border spillovers. Implicit and explicit guarantees for the banking system have heightened concerns about risk transfer between banks and the sovereign.

Coordinated support programs and the announcement of fiscal reforms in countries facing the greatest funding difficulties have helped contain the turmoil. The forceful response by European policymakers helped to stabilize funding markets and reduce tail risks. Nevertheless, sovereign risks remain elevated as markets continue to focus on high public debt burdens, unfavorable growth dynamics, and increased rollover risks and linkages to the banking system. Governments' efforts to credibly address fiscal sustainability concerns are made more difficult by significant uncertainty about growth prospects. Medium-term debt sustainability concerns can lead to funding difficulties in the short term in the case of large public debt rollovers and difficult market conditions.

The Fund said the banking system continues to build on the ongoing economic recovery. The estimate of total crisis-related bank writedowns and loan provisions between 2007 and 2010 has now fallen from $2.3trn in the April 2010 GFSR to $2.2trn. In addition, banks have made further progress in realizing those writedowns, with more than three quarters already reported. The average Tier 1 capital ratio in the global banking system rose to over 10% at end-2009. In the  baseline scenario, a gradual further strengthening of balance sheets is expected, with the further recovery of the economy.

Yet, the IMF says structural weaknesses in bank balance sheets remain, leaving them vulnerable to a confidence shock. These include a high degree of reliance on wholesale funding, little progress on lengthening the maturity of funding, and continued usage by some banks of central bank liquidity support. To reduce the vulnerability to potential future shocks, and to break the sensitivity and interconnectedness between sovereign and bank balance sheets, additional recapitalization and higher quality capital are still required in a number of countries. If left unaddressed, these weaknesses could intensify deleveraging pressures and place a further drag on the economic recovery.

The Fund says the crisis in advanced countries has shifted perceptions of risk-reward in favour of emerging markets assets, and has contributed to a reallocation of investment portfolios towards these assets. Emerging markets have become relatively more attractive compared with advanced economies because of their better fiscal fundamentals, stronger growth outlooks and higher yields. There is a scope for additional sizable asset reallocation to emerging markets, which could be overwhelming in some cases. The reallocation of a small proportion of financial assets of advanced countries could have very large effects on emerging market countries. A one percentage point shift of global equity and debt securities held by the world’s largest real money investors would result in additional portfolio flows of $485bn.

The intertwining of sovereign and banking risk, means that policymakers need to act on several fronts to ensure a sound global financial system and to safeguard the recovery:

  • Sovereign balance sheets need to be strengthened. Such plans will, of course, need to take into account country-specific circumstances, and be accompanied where necessary by growth enhancing structural reforms.

  • Legacy problems in the banking system need to be addressed and capital buffers strengthened. In some countries, both inside and outside of Europe, weaker nonviable financial institutions still need to be fully resolved and forced to withdraw from unprofitable activities in order to achieve a reduction in excess capacity.

  • Exits from extraordinary policy support need to be carefully considered. Central banks and governments should remain open to providing financial support, if and when needed, and make their exit strategies contingent on adequate progress on the economic and financial stability front.

  • Further regulatory reform and clarity on measures is needed to prevent future crises. The IMF said it welcomes the Basel Committee’s announcements, which entail substantial progress towards more robust bank capital and liquidity standards. But more needs to be done. It is essential to establish a broad reform agenda for the financial sector, that goes beyond the banking industry, and that addresses systemic risks generated by individual firms and collective behavior.

  • Te Fund said many emerging market policy makers need to focus on coping with the potential side effects of the relatively favorable outlook for their countries. Policy measures should also focus on the continued development of local capital markets and the reinforcement of regulation and supervisory frameworks to enhance the absorptive capacity of local financial systems to safely and efficiently intermediate structurally higher capital flows.

Related Articles
Related Articles


© Copyright 2010 by Finfacts.com

Top of Page

Global Economy
Latest Headlines
Strong Swiss franc gloom deepens for exporters
Global investors shift focus to China; EM outflows surge to $1tn in 13 months
Global oil glut will continue into 2016
Stable growth momentum in OECD area but slowing expected in China
Prices for major food commodities in July lowest since September 2009
Global manufacturing in July weakest level in two years
US, China and UK lead top 25 target countries for foreign direct investment
Budget surpluses rare in developed countries from 1980s; Italy, France, Greece had none in 60 and 40 years
Singapore, London and Shanghai top cities for new FDI projects in 2014; Dublin in 11th place
Exchange rates shuffle as Dublin ranked 49th most expensive city; Paris at 46; Berlin at 105
Western consumer groups under pressure in China and India
Developing countries facing “structural slowdown” likely to last for years
OECD BEPS Tax Project: Amazon books UK sales in UK; Australia proposes up to 100% in penalties
Emerging Markets Index falls to 12-month low in May as manufacturing contracts
US and world economies slowing in 2015 — OECD
Global manufacturing production rose slightly in May; Trade flows weak
GDP growth in OECD area slowed to 0.3% in the first quarter of 2015
Only one quarter of workers worldwide have stable employment contracts
Automatic Exchange of Tax Information: OECD says countries won't be able to game system
Gates Foundation loses in Swiss family's shares coup
Minimum wage levels in OECD countries
Brent oil benchmark over $68 a barrel - up almost 50% in 2015
Global growth slows and manufacturing dips to 21-month low
Family-controlled firms dominate European business
Top 10 of world’s 250 largest consumer products companies account for 30% of sales
Nine of world's 20 fastest growing economies in Africa
Globalisation maybe stalling as trade growth remains weak
Global growth prospects uneven across major economies says IMF
Emerging markets growth lowest since 2009; Global growth at 30-year average
China's economic rebalancing hitting Latin American economies
New York, London, HK & Singapore top global financial centres index; Dublin recovers
Global growth in modest expansion from low oil prices/ monetary easing says OECD
Composite leading indicators point to positive change in growth momentum in the Eurozone
Global labour market trends portend paradise for some but uncertainty for many workers
Vienna remains top of World Quality of Living Rankings in 2015; Dublin at 34
Zurich and Geneva overtake Singapore to become world's most expensive cities
HSBC Switzerland and Falciani: How it happened
Global economic power to continue shift from advanced economies
Global food price index falls in January; Cereal output set for record
Global debt has risen $57tn or 17% of world GDP since 2007