IMF warns of risks of a new financial crisis, market turmoil may recur
The International Monetary Fund has highlighted risks of a new financial crisis, warning that global output could be cut by 4% over the next five years by a repeat of the market mayhem witnessed during the 2008-09 recession.
The IMF used its half-yearly global financial stability report to call for urgent action on the problems of banks in the eurozone, a third of which it said faced “significant challenges” to be sustainably profitable.
“In the euro area, market pressures also highlighted long-standing legacy issues, indicating that a more complete solution to European banks’ problems cannot be further postponed,” the IMF said. It said there needed to be a comprehensive strategy to deal with €900bn (£715bn) of non-performing loans (NPLs) on the books of eurozone banks, adding that banks also needed to be closed in order to deal with excess capacity.
“The hardest hit banking systems within the euro area in February have been those of Greece, Italy and, to a lesser extent, Portugal, along with some large German banks, reflecting some or all of the following factors: structural problems of excess bank capacity, high levels of NPLs and poorly adapted business models.”
Noting that threats to global financial stability had increased since its last health check in October, the IMF said: “The main message of this report is that additional measures are needed to deliver a more balanced and potent policy mix for improving the growth and inflation outlook and securing financial stability. In the absence of such measures, market turmoil may recur.”
It added that there was a risk investors would demand high interest rates and that tougher financial conditions would create a “pernicious feedback loop” of fragile confidence, lower growth and inflation, and rising debt.
“Disruptions to global asset markets could increase the risks of tipping into a more serious and prolonged slowdown marked by financial and economic stagnation.”
