## Tough Political Decisions Needed to Fix the Financial System _IMF Blog, June 20, 2011_ ## Source details **Canonical URL:** [Tough Political Decisions Needed to Fix the Financial System](https://www.imf.org/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system) ## Other formats - [Markdown version](/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system/index.md) - [Structured JSON version](/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system/index.json) - [Bundle manifest](/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system/bundle-manifest.json) ## Bibliographic details - Authors: Jose-Vinals - Published: June 20, 2011 --- ### Context and framing - Author: José Viñals - Date: June 20, 2011 - Setting: Presentation of latest assessment of global financial stability in Sao Paulo. - High-level framing: - Three key messages: - First, financial risks have increased since April. - Second, policymakers in both advanced and emerging economies need to step up their efforts to preserve financial stability and safeguard the recovery. - 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. ### Increased financial stability risks — detailed findings - Investor reassessment and downside risks: - A string of negative surprises in recent economic data is prompting investors to reassess the sustainability of the economic recovery. - While a global recovery remains the most likely scenario, downside risks to this forecast have increased. - Any weakening in the economic outlook will threaten to stall—and possibly reverse—improvements in the balance sheets of banks and households. - Political resolve and European contagion concerns: - Increasing concerns about the political resolve to support the adjustment efforts in Europe. - 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. - United States and Japan vulnerabilities: - United States: increased financial market concerns due to the continuing political stalemate over the debt ceiling and the longer-tern fiscal path. - Japan: medium-term fiscal adjustment targets may have become even more challenging because of the impact of the recent earthquake and tsunami. - Effects of a prolonged period of low interest rates: - Accommodative monetary policies remain necessary in advanced economies, partly because of the limited progress in resolving structural problems. - A prolonged period of low interest rates may lead investors to underestimate risk in their search for yield, promoting the buildup of financial imbalances. - Two observed trends: - 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. - 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. ### Policy priorities and recommended actions - Overarching imperative: - Policymakers need to increase their efforts to tackle longstanding financial challenges once and for all. - Europe — two-pronged approach to reduce contagion risk: - (i) Push for a comprehensive plan to repair the financial system. - (ii) Reduce sovereign risk through credible medium-term fiscal consolidation. - Financial system actions: - Insufficient progress so far in strengthening bank funding and capital positions in some European Union countries. - 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. - Government fiscal actions: - 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. - Advanced economies versus emerging economies: - Advanced economies need an orderly de-leveraging, which means they would cut back on the amount they borrow. - Emerging economies need to focus on orderly re-leveraging. - They should guard against overheating and the buildup of financial imbalances characterized by strong credit growth, rising inflation, and surging capital inflows. - 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. - 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. - Macroprudential and capital flow measures: - 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. - However, they cannot substitute for appropriate macroeconomic policies. ### Risks to policy effectiveness and political constraints - 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. *Source: Tough Political Decisions Needed to Fix the Financial System, José Viñals, June 20, 2011.* --- ## Content in this bundle - **062011a** - [062011a (PDF)](/external/arabic/np/vc/2011/062011a.pdf){rel="external" type="text/html; charset=utf-8"} - **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** - [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)](/external/chinese/np/vc/2011/062011c.pdf.md){rel="alternate" type="text/markdown"} - [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)](/external/chinese/np/vc/2011/062011c.pdf){rel="external" type="application/pdf"} - **Необходимо принять трудные политические решения, чтобы наладить финансовую систему** - [Необходимо принять трудные политические решения, чтобы наладить финансовую систему (Markdown version)](/external/russian/np/vc/2011/062011r.pdf.md){rel="alternate" type="text/markdown"} - [Необходимо принять трудные политические решения, чтобы наладить финансовую систему (PDF)](/external/russian/np/vc/2011/062011r.pdf){rel="external" type="application/pdf"} --- ## References - [global financial stability](http://www.imf.org/external/pubs/ft/survey/so/2011/NEW061711A.htm) _Source: https://www.imf.org/en/blogs/articles/2011/06/20/tough-political-decisions-needed-to-fix-the-financial-system_