Sovereign risk may prolong crisis: IMF

Sovereign risk may prolong crisis: IMF

Washington: Concern over public debt could prolong the credit crisis though Greece is a special case and should not be compared with other euro zone members, the International Monetary Fund, or IMF, said on Tuesday.

IMF said the health of the global financial system had improved alongside a fragile recovery in the world economy, but that investors’ nerves over rising levels of public debt could undermine stability gains made so far.

“Advanced country sovereign risks could undermine stability gains and take the credit crisis into a new phase," IMF said in an update of its Global Financial Stability Report.

IMF said there was a danger that deteriorating sovereign credit risk could quickly spill over to domestic banking systems and feed through into the real economy, triggering fresh financial instability.

The concern is that investors will demand higher interest rates to buy government debt, driving up borrowing costs for both the public and private sector.

Jose Vinals, director of IMF’s monetary and capital markets department, said IMF was not indicating another crisis was imminent.

“We’re saying that as a result of the crisis, the accumulation of public debt has been significant and there is concern now in the market with sovereign risk," he told reporters.

He said countries must act now and design credible medium-term fiscal consolidation plans that have public support.

But he dismissed concerns that problems in Greece could be replicated in other countries such as Portugal and Spain. “Greece is a special case and we can’t say other countries are in that situation," he said. “These other countries have solid fiscal institutions and don’t have the fiscal uncertainties that Greece had," he added.

IMF reduced estimates of global bank write-downs to $2.3 trillion (Rs102.58 trillion) from the $2.8 trillion it forecast in October, a reduction that reflects improvements in the global economy and in bank balance sheets, it said.

This is significantly below previous estimates as high as $4 trillion a year ago. However, that figure included losses for insurance firms as well, and also reflected a point when the stock market and other assets were in the doldrums. Asset prices have rallied since then, allowing banks to recoup some of those predicted losses.

The report said banks, however, face new challenges including from more stringent regulation that may require them to raise further capital and make their balance sheets less risky.