How to Exit the Danger Zone: IMF Update on Global Financial Stability
IMF Blog, January 24, 2012
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Bibliographic details
- Authors: JosVials
- Published: January 24, 2012
Overview
- Author: José Viñals
- Date: January 24, 2012
- Central judgment: Since September of last year, risks to global financial stability have deepened, notably in the euro area; recent ECB and other measures have improved conditions but the system remains well within the "danger zone."
Main sources of risk
- Sovereign financing stress:
- "Almost two-thirds of outstanding euro area bonds at spreads in excess of 150 basis points."
- Financing prospects are challenging; markets remain very volatile and long-term foreign investors have sharply reduced exposure to a number of euro area debt markets, including some in the core.
- Keeping long-term foreign investors involved is essential to stabilizing markets.
- Bank deleveraging risks:
- European banks have had excessive levels of leverage and had expanded into a number of non-core areas.
- Deleveraging can be beneficial (increasing capital, shedding bad loans, withdrawing from non-core businesses) but can also be harmful if "too fast, overly concentrated in some areas, and could cut off credit at the expense of the economy."
- European bank deleveraging may ignite an adverse feedback loop to euro area economies and beyond even if acute pressures have been mitigated by recent extraordinary ECB measures.
- Spillover risks:
- Emerging European economies would be most affected due to the substantial presence of euro area banks.
- The United States is also vulnerable given close trans-Atlantic financial and trade connections and the still-fragile U.S. housing sector.
- Market support conditions:
- Bank funding markets are described as "on life support from the European Central Bank (ECB)."
Policy priorities and recommendations
- General imperative:
- "Policymakers need to press ahead and bolster plans to restore financial stability in the euro area and beyond. Urgent policy action is needed."
- First: build and size the "firewall"
- The firewall must be "sufficiently large and convincingly built to avoid abnormally high funding costs for sovereigns and banks."
- Strengthen and advance work on the European Stability Mechanism (ESM) "as soon as possible."
- Action by the ECB to provide necessary liquidity support to stabilize bank funding and sovereign debt markets is "essential."
- IMF aims to raise "up to $500 billion in additional lending resources to create a global firewall."
- Second: appoint a macroprudential gatekeeper
- Ensure bank deleveraging plans are consistent with sustaining the flow of credit and avoiding a downward spiral in asset prices.
- Address potentially harmful effects of deleveraging at both national and international levels.
- Within the European Union, coordinate such a role among European banking authorities.
- Third: increase bank capital buffers credibly
- Banks should increase their capital levels, "not just capital ratios," in line with recent European Banking Authority (EBA) recommendations.
- For solvent and otherwise viable banks that cannot raise sufficient private capital, make public funds available "based on strict conditionality."
- Establish a pan-euro-area facility with capacity to take direct stakes in banks to limit additional burden on some sovereigns.
- Fourth: calibrate fiscal adjustment with growth considerations
- "Adjustment remains essential, but the short-term impact on growth should be taken into account."
- Assure sovereign solvency through credible medium-term fiscal consolidation strategies within a solid euro area framework.
- Over the longer term, strengthen fiscal and financial union initiatives to restore market confidence.
- Elsewhere, the United States and Japan need to address their fiscal challenges; the United States must also "solve the problems of the housing market and mortgage debt overhang."
- Fifth: emerging market readiness
- Policymakers in emerging markets should stand ready to counter funding and credit strains and deploy countercyclical policies where headroom is available.
- Many emerging markets have built "ample cushions of reserves" that could be used to counter external liquidity shocks.
Key warnings and outlook
- The global financial system "remains fragile."
- Failure to restore confidence in the euro area and beyond risks "a deepening of the crisis, with far-reaching global economic and social consequences."
- Optimistic conclusion: "Fortunately, it is not too late to put in place the right policies that take us out of the danger zone," contingent on good politics and collective determination for cooperative solutions within Europe and globally.
IMF blog post by José Viñals, January 24, 2012.
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- iMFdirect 博客: 如何走出危险区 - 基金组织报告全球金融稳定方面的最新进展, 2012年1月24日
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