Challenges to restoring financial stability remain: IMF

By Arun Kumar, IANS,

Washington : Warning that significant challenges to restoring financial stability remain despite an unprecedented policy response to the global economic crisis, the International Monetary Fund (IMF) has called for “continued decisive and effective action” to reinforce signs of market recovery.

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Measures including the recent expansion of resources for international institutions and IMF’s enhanced lending framework are gradually beginning to restore market confidence, but the challenges to restoring financial stability remain significant, it said in the Global Financial Stability Report (GFSR) released Tuesday.

“Continued decisive and effective action is needed to preserve and strengthen these first signs of improvement, and to help provide a more stable and resilient platform for sustained global growth,” Jose Vinals, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, said.

“The retrenchment of capital flows is straining economies that have relied on foreign-financed credit growth, while the deteriorating economic environment has increased expected bank writedowns and raised the need for fresh capital in emerging market banks, Vinals told reporters.

In particular, emerging market risks have risen the most in the past six months, the report said. The credit deterioration is taking an increasing toll on bank balance sheets, with the IMF emphasising the need to cleanse them of impaired assets.

As institutions reduce assets during a period of deleveraging, international capital flows to emerging markets have been curtailed, it said noting “the effects have been harsh in some cases. The retrenchment from cross-border markets is outpacing the overall deleveraging process.”

On balance, emerging markets could experience net outflows of private capital in 2009, with but slim chances of recovery in 2010 and 2011.

Banks in countries which were dependent on such cross border flows have suffered greatly, but the effects are also being felt by companies in many emerging market, the report said.

Within emerging markets, eastern European economies have been the hardest hit. The linkages between western Europe and emerging European banking systems make the region particularly vulnerable.

“The global response to date has been rapid, but often piecemeal and insufficient to bolster public confidence,” the IMF said. “In particular, the global banking system needs to be cleansed of its impaired assets.”

“Overall, further decisive and effective policy actions will be needed to stabilise the international financial system,” it said.