The economic crisis could be entering a "new phase" with rising public debt threatening to undermine the stability of the global financial system, the International Monetary Fund warned Tuesday. In a biannual report on economic stability, the IMF said the latest challenge to the world's rocky financial system came as banks were regaining their footing amid a global recovery.
"Risks to global financial stability have eased as the economic recovery has gained steam, but concerns about advanced country sovereign risks could undermine stability gains and prolong the collapse of credit," the report said. "Without more fully restoring the health of financial and household balance sheets, a worsening of public debt sustainability could be transmitted back to banking systems or across borders." In its Global Financial Stability Report, the IMF scaled back its estimate of bank writedowns since the start of the crisis through 2010 to 2.3 trillion dollars, from 2.8 trillion in October.
The fund estimated that banks have already written off 1.5 trillion dollars of the 2.3 trillion. It said that while the world has avoided a full-blown depression, "risks remain elevated due to the still-fragile nature of the recovery and the ongoing repair of balance sheets.
"Attention has shifted toward sovereign risks that could undermine stability gains and take the credit crisis into a new phase, as we begin to reach the limits of public sector support for the financial system and the real economy." The fund warned that longer-term concerns about solvency could result in short-term strains on funding markets, which "may have negative implications for a recovery of private credit."
"Even though capital needs have fallen, banks still face considerable challenges," it said. Banks will need to refinance a large amount of short-term funding this year; investors will want to see more and higher-quality capital in anticipation of tougher regulation, and not all losses have been written down, it said.
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