{
  "title": "Tough Political Decisions Needed to Fix the Financial System",
  "publication": "IMF Blog, June 20, 2011",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system",
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  "summary": "Author: José Viñals",
  "sections": [
    {
      "heading": "Context and framing",
      "content": "- Author: José Viñals\n- Date: June 20, 2011\n- Setting: Presentation of latest assessment of global financial stability in Sao Paulo.\n- High-level framing:\n  - Three key messages:\n    - First, financial risks have increased since April.\n    - Second, policymakers in both advanced and emerging economies need to step up their efforts to preserve financial stability and safeguard the recovery.\n    - Third, we have entered into a new phase of the crisis - a political phase - when tough political decisions will need to be made, because the window for substantial policy action is closing. Time is of the essence."
    },
    {
      "heading": "Increased financial stability risks — detailed findings",
      "content": "- Investor reassessment and downside risks:\n  - A string of negative surprises in recent economic data is prompting investors to reassess the sustainability of the economic recovery.\n  - While a global recovery remains the most likely scenario, downside risks to this forecast have increased.\n  - Any weakening in the economic outlook will threaten to stall—and possibly reverse—improvements in the balance sheets of banks and households.\n- Political resolve and European contagion concerns:\n  - Increasing concerns about the political resolve to support the adjustment efforts in Europe.\n  - The lack of a comprehensive solution has led to increased financial market pressures on some European governments, and has rekindled worries about potential contagion within and beyond Europe.\n- United States and Japan vulnerabilities:\n  - United States: increased financial market concerns due to the continuing political stalemate over the debt ceiling and the longer-tern fiscal path.\n  - Japan: medium-term fiscal adjustment targets may have become even more challenging because of the impact of the recent earthquake and tsunami.\n- Effects of a prolonged period of low interest rates:\n  - Accommodative monetary policies remain necessary in advanced economies, partly because of the limited progress in resolving structural problems.\n  - A prolonged period of low interest rates may lead investors to underestimate risk in their search for yield, promoting the buildup of financial imbalances.\n  - Two observed trends:\n    - The declining cost of debt is prompting some companies and investors to rediscover their appetite for financial leverage. There is evidence of such re-leveraging in the market for corporate high-yield bonds and leveraged loans.\n    - Investors’ search for yield has also spurred strong capital inflows into some key emerging markets, although such flows have recently eased. For example, buoyant foreign demand has led to a recent surge in international corporate bond issuance, notably from Latin America, and a decline in corporate bond yields."
    },
    {
      "heading": "Policy priorities and recommended actions",
      "content": "- Overarching imperative:\n  - Policymakers need to increase their efforts to tackle longstanding financial challenges once and for all.\n- Europe — two-pronged approach to reduce contagion risk:\n  - (i) Push for a comprehensive plan to repair the financial system.\n  - (ii) Reduce sovereign risk through credible medium-term fiscal consolidation.\n- Financial system actions:\n  - Insufficient progress so far in strengthening bank funding and capital positions in some European Union countries.\n  - The forthcoming stress tests by the European Banking Authority will be a decisive opportunity to enhance transparency and address the weak tail of undercapitalized banks.\n- Government fiscal actions:\n  - Political resolve is required to address medium-term fiscal adjustment needs in several advanced countries, including the United States and Japan, which have yet to take decisive action in this area.\n- Advanced economies versus emerging economies:\n  - Advanced economies need an orderly de-leveraging, which means they would cut back on the amount they borrow.\n  - Emerging economies need to focus on orderly re-leveraging.\n    - They should guard against overheating and the buildup of financial imbalances characterized by strong credit growth, rising inflation, and surging capital inflows.\n    - Corporate leverage is also rising, and weaker firms are now accessing international capital markets, which could make corporate balance sheets more vulnerable to external shocks.\n    - With strong domestic demand pressures—especially in emerging Asia and Latin America—macroeconomic measures are needed to avoid overheating, accumulating financial risks, and undermining policy credibility.\n- Macroprudential and capital flow measures:\n  - Macroprudential tools, such as higher reserve requirements, and, in some cases, a limited use of capital controls, can play a supportive role in managing capital flows and their effects.\n  - However, they cannot substitute for appropriate macroeconomic policies."
    },
    {
      "heading": "Risks to policy effectiveness and political constraints",
      "content": "- Policymakers continue to face potentially large future shocks to the financial system, at a time when its resilience is not yet assured.\n- There is less room for maneuver to counter these shocks through traditional fiscal and monetary policies.\n- In increasingly gridlocked political systems, policymakers may find it progressively harder to take substantial policy action to address sovereign and financial risks.\n- Concluding imperative: We are now in a new phase of the crisis - the political phase - and tough political decisions need to be made. Time is of the essence.\n\nSource: Tough Political Decisions Needed to Fix the Financial System, José Viñals, June 20, 2011.\n\n---\n\n Content in this bundle\n\n- 062011a\n  - 062011a (PDF){rel=\"external\" type=\"text/html; charset=utf-8\"}\n- 2011 年 6 月 20 日发布;修复金融体系需要做出艰难的政治决策;José Viñals\n  - 2011 年 6 月 20 日发布;修复金融体系需要做出艰难的政治决策;José Viñals (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 2011 年 6 月 20 日发布;修复金融体系需要做出艰难的政治决策;José Viñals (PDF){rel=\"external\" type=\"application/pdf\"}\n- Необходимо принять трудные политические решения, чтобы наладить финансовую систему\n  - Необходимо принять трудные политические решения, чтобы наладить финансовую систему (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Необходимо принять трудные политические решения, чтобы наладить финансовую систему (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- global financial stability\n\nSource: https://www.imf.org/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system"
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    "Authors: Jose-Vinals",
    "Published: June 20, 2011",
    "Author: José Viñals",
    "Date: June 20, 2011",
    "Setting: Presentation of latest assessment of global financial stability in Sao Paulo.",
    "High-level framing:",
    "Investor reassessment and downside risks:",
    "Political resolve and European contagion concerns:",
    "United States and Japan vulnerabilities:",
    "Effects of a prolonged period of low interest rates:",
    "Overarching imperative:",
    "Europe — two-pronged approach to reduce contagion risk:",
    "Financial system actions:",
    "Government fiscal actions:",
    "Advanced economies versus emerging economies:",
    "Macroprudential and capital flow measures:",
    "Policymakers continue to face potentially large future shocks to the financial system, at a time when its resilience is not yet assured.",
    "There is less room for maneuver to counter these shocks through traditional fiscal and monetary policies.",
    "In increasingly gridlocked political systems, policymakers may find it progressively harder to take substantial policy action to address sovereign and financial risks.",
    "Concluding imperative: We are now in a new phase of the crisis - the political phase - and tough political decisions need to be made. Time is of the essence.",
    "**062011a**",
    "**2011 年 6 月 20 日发布;修复金融体系需要做出艰难的政治决策;José Viñals**",
    "**Необходимо принять трудные политические решения, чтобы наладить финансовую систему**",
    "[global financial stability](http://www.imf.org/external/pubs/ft/survey/so/2011/NEW061711A.htm)"
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