Debt burdens endanger world financial stability, IMF warns

08:42, April 21, 2010      

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Public debt crisis in advanced economies could put risks on global financial stability and prolong weakness in the credit market, the International Monetary Fund (IMF) said on Tuesday.

In its latest Global Financial Stability Report, IMF said the health of the global financial system has improved as the economic recovery has gained steam, but stability risks remain elevated.

The annual spring meetings of the IMF and the World Bank are scheduled on this weekend. The finance ministers and central bankers from the Group of 20 countries will meet in Washington on Friday to discuss about changes in financial regulation.

Debt risks

IMF said that the global banking system is coping with legacy problems and further challenges from the deleveraging process.

"Improving economic and financial market conditions have reduced banks' expected writedowns from 2.8 trillion to 2.3 trillion U.S. dollars, and bank capital positions have improved substantially," the report said, "But some segments of country banking systems remain poorly capitalized and still face significant downside risks."

IMF said that the credit recovery will be slow, shallow, and uneven as banks continue to repair balance sheets. It warned that notwithstanding the weak recovery in private credit demand, ballooning sovereign needs may bump up against limited credit supply.

The organization said that governments in advanced countries need to adopt policies that can reduce sovereign risks through well designed fiscal consolidation strategies, clean up the crisis legacy and facilitate a smooth deleveraging process by ensuring that a core of healthy, viable banks is able to support credit.

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