Mounting debt poses new threat to global recovery: IMF

April 20th, 2010 - 10:26 pm ICT by IANS  

By Arun Kumar
Washington, April 20 (IANS) The sharp rise in government debt in the developed world during the economic crisis has helped create what the International Monetary Fund says is the newest threat to the global financial system: growing sovereign risk.

While the world economy is slowly regaining health, thanks in large part to unprecedented interventions by governments, the private financial sector is not fully recovered, the agency said in its latest Global Financial Stability Report (GFSR), released Tuesday.

Bank balance sheets still contain bad assets, consumers and businesses remain stretched, and credit recovery is some time off, said the report released ahead of meetings this week between the fund and the finance ministers of the G-20 group of leading economies, including India.

Indeed, the recovery in the financial sector remains “fragile,” according to José Viñals, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department.

Moreover, a large part of the financial system continues to rely in varying degrees upon the extraordinary measures governments began to introduce two years ago - such as purchasing bad assets from, and injecting capital into, troubled institutions, IMF said.

But the biggest threats have moved from the private to the public sectors in advanced economies. Governments not only took on many of the bad assets from private institutions but due to the recession face continuing heavy borrowing needs for the next few years.

Slow growth in the real economy and high unemployment will retard tax revenues and require higher government spending - such as on unemployment benefits and job creation activities, the agency said.

“In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured,” Viñals said at a news conference.

“If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the very real risk of undermining the recovery and extending the financial crisis into a new phase.”

In a wide-ranging assessment of the state of the global financial conditions, the IMF also warned that the increase in sovereign risk can hit banking systems and the real economy that produces goods, services, and jobs.

Even with weaker private credit demand, governments could crowd out business and household borrowers, retarding recovery, it said.

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