This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.guardian.co.uk/business/2013/apr/17/imf-world-economy-risk-new-financial-crisis

The article has changed 3 times. There is an RSS feed of changes available.

Version 0 Version 1
IMF warns world economy risks chronic new phase of financial crisis IMF warns world economy risks chronic new phase of financial crisis
(about 3 hours later)
The International Monetary Fund has warned that the repair job on the world's battered financial system is only partly completed and said failure to finish the job risks propelling the crisis into a chronic new phase. The International Monetary Fund has warned that new risks to global financial stability are already emerging before the problems left by the deepest slump since the 1930s have been sorted out.
While being encouraged by the marked improvement in financial market conditions over the past six months, the IMF said further action was needed to tackle underlying threats to stability. In its half-yearly healthcheck on the financial system, the Fund said failure to deal with old and new risks risked propelling the five-year old crisis into a fresh chronic phase.
In its half-yearly Global Financial Stability Review, the fund said that the recent problems in Cyprus were a reminder of the continued fragility of market confidence. José Viñals, the IMF's financial counsellor) said the improvement in financial markets seen over the past six months would not be sustained unless policy makers addressed "key underlying vulnerabilities".
"Global market conditions have improved appreciably in the past six months, providing additional support to the economy, and prompting a sharp rally in risk assets", the report said. The Fund's Global Financial Stability Report (GFSR) identified the euro area as one of the two significant legacy risks from the crisis. It said EU banks might need to reduce their leverage by a further $1.5tn (£0.9tn), and that credit was still not flowing to the countries on the periphery of the single currency zone.
"These favourable conditions reflect a combination of deeper policy commitments, renewed monetary stimulus, and continued liquidity support." Viñals said that the repair job on banks around the world was only partially completed, with a need to strengthen balance sheets and complete reforms of regulation.
But with only a modest recovery in the global economy since the deep slump of 2008-09, the report said the improvement in financial market conditions could only be sustained through measures to address issues that posed risks both to financial stability and growth. He added that the three new risks were the US, where corporate debt underwriting standards were "weakening rapidly"; the possibility that a flood of cheap money from developed countries could de-stabilise emerging markets; and the dangers involved in unwinding prolonged monetary easing in America. "Put simply, we are in uncharted territory", Viñals said.
"A key message of this report is that addressing the old risks is essential to leave the crisis behind. But it also reduces the need for continued accommodative monetary policies. This will prevent the new risks from growing and from becoming systemic."
The GFSR noted that global financial market conditions had improved appreciably in the past six months, providing support to growth and prompting a sharp rally in a willingness to hold riskier assets.
"These favourable conditions reflect a combination of deeper policy commitments, renewed monetary stimulus, and continued liquidity support," it added.
"Continued improvements will require further balance sheet repair in the financial sector and a smooth unwinding of public and private debt overhangs. If progress in addressing these medium-term challenges falters, risks could reappear. The global financial crisis could morph into a more chronic phase marked by a deterioration of financial conditions and recurring bouts of financial stability.""Continued improvements will require further balance sheet repair in the financial sector and a smooth unwinding of public and private debt overhangs. If progress in addressing these medium-term challenges falters, risks could reappear. The global financial crisis could morph into a more chronic phase marked by a deterioration of financial conditions and recurring bouts of financial stability."
The IMF has been particularly cheered by the lessening of financial tension in the eurozone, which it believed was at risk of breaking up when the crisis was at its most acute in the middle of last year. It added that a higher appetite for risk could lead to exaggerated valuations and rising leverage, which could become systemic and spill over into emerging market economies. "Most sectors exhibit few clear signs of asset price bubbles just yet, despite relatively rapid price gains. However, signs of overheating in real estate markets are evident in some European countries, in Canada, and in some emerging market economies."
But it said despite "this notable progress", many banks in countries on the periphery of the eurozone remained challenged by high funding costs, the deteriorating quality of their assets and weak profits. The IMF said the recent problems in Cyprus were a reminder of the continued fragility of market confidence, but Viñals stressed that the bail-out for the Mediterranean island – under which there will be massive losses on bank deposits of more than €100,000 (£86,000) – was a one-off.
"The potential for contagion from developments in Cyprus is an important reminder of the fragility of market confidence. Although the adverse reaction to increased risk has not been intense in all markets, there was a renewed flight to safe assets and a sell off in some euro area assets." "Cyprus was unique. Deposit holders in the rest of the euro area should not be concerned, Vinals said.
While the use of expansionary policies have been designed to encourage banks to become less cautious, the report said the approach could prove dangerous: "These policies are generating a substantial rebalancing of private investor portfolios toward riskier assets, as intended. However, a prolonged period of extraordinary monetary accommodation could push portfolio rebalancing and risk appetite to the point of creating significant adverse side effects." The GFSR noted: "The potential for contagion from developments in Cyprus is an important reminder of the fragility of market confidence. Although the adverse reaction to increased risk has not been intense in all markets, there was a renewed flight to safe assets and a sell off in some euro area assets."
It added: "A higher appetite for risk could lead to exaggerated valuations and rising leverage, which may become systemic and spill over to emerging market economies. Most sectors exhibit few clear signs of asset price bubbles just yet, despite relatively rapid price gains.
"However, signs of overheating in real estate markets are evident in some European countries, in Canada, and in some emerging market economies."
The IMF said advanced western economies had taken significant steps to restructure their balance sheets, but progress had been uneven, with the process largely complete in the US but requiring further work elsewhere.
It said balance sheet weaknesses remained in the UK banking system, where buffers against impaired loans were not as strong as in some other countries.It said balance sheet weaknesses remained in the UK banking system, where buffers against impaired loans were not as strong as in some other countries.
"While major UK and core euro area banks have been actively de-risking and de-leveraging more needs to be done to complete the repair of balance sheets.""While major UK and core euro area banks have been actively de-risking and de-leveraging more needs to be done to complete the repair of balance sheets."
The report added: "The Libor scandal and several other high-profile fines and lawsuits related to compliance failures and mis-selling allegations continue to weigh on banks' profits."