How to Exit the Danger Zone: IMF Update on Global Financial Stability


By José Viñals

(Versions in  عربي, 中文, EspañolFrançaisРусский日本語)

Since September of last year, risks to global financial stability have deepened, notably in the euro area.

However, over the past few weeks, markets have been encouraged by measures to provide liquidity to banks and sovereigns in the euro area. This recent improvement should not be taken for granted, as some sovereign debt markets remain under stress, and as bank funding markets are on life support from the European Central Bank (ECB).

Main sources of risk

Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.

Despite the recent improvements, sovereign financing stress has increased for many countries—with almost two-thirds of outstanding euro area bonds at spreads in excess of 150 basis points—and financing prospects are challenging. Markets remain very volatile and long-term foreign investors have sharply reduced their exposure to a number of euro area debt markets, including some in the core. Keeping these investors involved is essential to stabilizing markets.

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The Danger Zone: Financial Stability Risks Soar


By José Viñals

(Versions in عربيFrançais日本語, and Русский)

We are back in the danger zone. Since the IMF’s previous Global Financial Stability Report, financial stability risks have increased substantially—reversing some of the progress that had been made over the previous three years.

 Several shocks have recently buffeted the global financial system: unequivocal signs of a broader global economic slowdown; fresh market turbulence in the euro area; and the credit downgrade of the United States.

This has thrown us into a crisis of confidence driven by three main factors: weak growth, weak balance sheets, and weak politics. Continue reading

Avoiding Another Year of Living Dangerously: Time to Secure Financial Stability


By José Viñals

In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath.

But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Durable financial stability has, so far, proven elusive.

Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies—while necessary to restart the economy—have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible. Continue reading

Don’t Forget Financial Sector Reform


By John Lipsky

There is a broad consensus on at least one conclusion from the turmoil of the past few years: Fundamental changes are needed in the global financial sector.

Some of these changes seem relatively clear:

  • Risk management of many financial firms needs strengthening
  • Compensation schemes need to be re-evaluated
  • Capital standards need to be bolstered
  • Regulation needs fundamental reform
  • Supervision needs to be improved
  • And financial institutions’ balance sheets need to be freed of the burden of impaired assets.

Nonetheless, important tradeoffs will have to be addressed—and political hurdles surmounted—before significant progress can be achieved.

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