By José Viñals
Recent policy actions in Europe, the United States, in emerging markets, and here in Japan, where I’m attending the IMF-World Bank annual meetings, have improved investor sentiment and helped markets rebound in recent months.
Yet our latest assessment is that confidence is still very fragile and risks have increased, when compared to the IMF’s last report in April. Policymakers need to do more to gain lasting stability.
The principal risk remains the euro area. The forces of financial and economic fragmentation have widened the divide between countries at the core and the “periphery” of the euro zone. Faltering confidence and policy uncertainty have led to a pullback of cross-border private capital flows from the periphery—quite an extraordinary phenomenon within a currency union.
This has driven up funding costs to governments and banks, as well as for companies and households, and, in turn, threatening a vicious downward economic spiral.
Filed under: Advanced Economies, Annual Meetings, Asia, Economic Crisis, Economic research, Emerging Markets, Europe, Finance, Financial Crisis, Financial regulation, Globalization, IMF, International Monetary Fund, Politics, Public debt | Tagged: Asia, bank assets, banking union, banks, corporate bonds, cross-border capital flows, currency union, debt ceiling, eastern Europe, emerging economies, emerging markets, Europe, European Banking Authority, European Central Bank, European Stabilization Mechanism, financial markets, fiscal cliff, fiscal policy, Global Financial Stability Report, government bonds, governments, IIMF, interest rates, International Monetary Fund, investors, Japan, Latin America, macroprudential, monetary policy, risk premia, United States | 3 Comments »