IMF Sees
Heightened Risks to Global
Financial Stability and Urges
Comprehensive Action
Press Release No. 08/235
October 7, 2008
The International Monetary
Fund (IMF) today said the state
of the global financial system
has worsened since its last
assessment in April 2008. The
ongoing deleveraging process has
accelerated and threatens to
become disorderly increasing the
risk a severe adverse feedback
loop between the financial
system and the broader economy.
Monetary and financial
conditions have tightened
further, risk appetites have
continued to retrench, and
global macroeconomic, credit,
market, liquidity, and emerging
market risks have increased,
according to the October 2008
edition of the IMF's Global
Financial Stability Report (GFSR).
The IMF also underscored the
determination of governments to
respond to the challenges, but
said that the restoration of
financial stability would
benefit from a collective
commitment by authorities to
address the challenges
effectively.
"Today's GFSR report shows
how serious a crisis we
currently face," IMF Managing
Director Dominique Strauss-Kahn
stated. "The time for piecemeal
solutions is over. I therefore
call on policymakers to urgently
address the crisis at a national
level with comprehensive
measures to restore confidence
in the financial sector. At the
same time, national governments
must closely coordinate these
efforts to bring about a return
to stability in the
international financial system."
Mr. Jaime Caruana, Counsellor
and Director of the IMF's
Monetary and Capital Markets
Department, which authored the
report, noted, "The global
financial system has undergone
unprecedented turmoil in the
last few months, and the
situation has worsened
considerably since Spring. But,
as severe as circumstances are,
the resolve and sense of urgency
of country authorities to tackle
the issues at hand and the sense
of urgency to intensify
international cooperation are
encouraging developments."
"Concrete actions, however,
are needed to tackle
insufficient capital, falling
asset valuations, and a
dysfunctional funding market.
Such a comprehensive approach,
if consistent among countries,
should be sufficient to restore
confidence and the proper
functioning of markets, and
avert a more protracted downturn
in the global economy," he
added.
The U.S. remains the
epicenter of the financial
crisis, with its housing market
continuing to decline and a
wider economic slowdown
contributing to a further
deterioration in the quality of
existing loans. With the turning
point in the default cycle yet
to be reached, the GFSR
estimates that declared losses
on U.S.-originated loans and
securitized assets are likely to
amount to about $1.4 trillion,
compared to the April 2008 GFSR
estimate of $945 billion.
Authorities in the U.S. and a
number of countries have taken
measures to bolster confidence
in financial institutions and
markets, including injecting
capital in financial
institutions or proposing to buy
troubled assets. "The ultimate
success of these measures is
difficult to gauge. But as the
specifics become clear, the
authorities will need to
communicate clearly how the
risks to taxpayers will be
contained," Caruana said.
The GFSR notes borrowers and
financial institutions in
emerging markets, which until
recently remained fairly
resilient, will be confronted
with a much more challenging
economic environment: A
combination of global credit
tightening, and economic
slowdown, which could accelerate
a downturn in the domestic
credit cycle in some countries.
Those economies with greater
reliance on short-term flows or
with leveraged banking systems
funded internationally are
particularly vulnerable.
In the short term, and to
bolster global financial
stability, the GFSR recommends
that authorities of affected
countries publicly make a
collective commitment to address
the issue. Based on experience
from earlier crises, it
recommends five principles that
can help authorities restore
confidence in these exceptional
circumstances: (i) employ
measures that are comprehensive,
timely, and clearly
communicated; (ii) aim for a
consistent and coherent set of
policies to stabilize the global
financial system across
countries; (iii) ensure rapid
response on the basis of early
detection of strains in order to
contain systemic repercussions;
(iv) assure that emergency
government interventions are
temporary and taxpayer interests
are protected; and (v) avoid
losing sight of the objective of
a more sound, competitive, and
efficient financial system going
forward.
Summary of GFSR's Analytic
Chapters
Chapter 2 of the GFSR
explores the inability of bank
funding markets to perform their
role in distributing liquidity
across institutions and
concludes that the interest rate
channel of monetary policy has
become much less reliable. It
recommends improving the
infrastructure in funding
markets, increasing the
authorities' attention to both
credit and liquidity risks, and
encouraging central bank
cooperation and communication.
Chapter 3 analyses the
potential procyclical role that
the application of Fair Value
Accounting (FVA) methods may
have played in the development
and outcome of the current
credit cycle. It concludes that
the application of FVA is still
the way forward, but further
enhancements of FVA
methodologies will be needed to
mitigate the exaggerated effects
of some valuation techniques.
Chapter 4 examines equity
markets in emerging market
countries to assess the extent
to which external and domestic
factors drive equity market
valuations. It finds that global
factors are as important in
explaining the movement in
emerging market equity prices as
are domestic fundamentals, and
that opportunity for spillovers
from advanced economies to
emerging equity markets has
risen, suggesting a growing
transmission channel for equity
price movements. Policy makers
need to remain engaged over the
longer run in building
resilience in their local
financial markets.
IMF EXTERNAL RELATIONS DEPARTMENT
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