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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Year in Review: Lessons from History–No Way Back to Cheap, Easy Credit


By James Boughton

The world economy is beginning to awaken from a nightmare. What hit us, and what was the tossing and turning all about? The popular simile is a comparison with the Great Depression, as in “This is the worst downturn since the 1930s.”

In fact, unless we get hit with another hammer before we fully wake up, the Great Recession is very unlike what the world went through some seven decades earlier.

The Great Depression, like the recent collapse, began with a banking crisis, but of a different kind. Instead of emanating from huge financial institutions in major money markets, the earlier one spread outward from small midwestern banks in the United States and led eventually to a near total loss of confidence.

Depositors pulled their money out into cash or gold, and the U.S. banking system shut down. Investors in other countries also moved heavily into “safe” assets.

Cars in line at U.S. gas station in 1979: the world in which consumption could flourish amid cheap and readily available energy was gone forever (photo: R. Krubner/ClassicStock/Corbis)

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