by Don Alexander, MBA
Associate, RSD Solutions Inc.
The increased strains from the euro area debt crisis continue to weigh on global economic prospects and caused the IMF to sharply cut its forecast for global growth this year, have dimmed prospects and financial stability risks have increased noted in the latest market update (IMF Global Market Stability Report “GMSR” Market Update, Jan. 2012).
Since the last GMSR, the risks for stability have increased, despite various policy steps to contain the euro area debt crisis and banking crisis. European policymakers have outlined significant policy measures to address the medium-term issues contributing to the crisis, and some of these have helped improve market sentiment, but sovereign financing remains challenging and downside risks remain.
If funding challenges result in a round of de-leveraging by banks, this could ignite an adverse feedback loop to euro area economies. The US and other advanced countries have homegrown challenges in the removal of financial tail risks, including overcoming obstacles to achieving an appropriate pace of fiscal consolidation. Developments in the euro area also threaten emerging Europe and may spillover elsewhere.
Further policy actions are needed to restore market confidence. This effort will require building larger backstops for sovereign financing, assuring adequate bank funding and capital, and maintaining a sufficient flow of credit to the economy possibly establishing a “gatekeeper” charged with prevent a disorderly bank deleveraging.
Emerging markets, outside of Europe, and Asian countries are exposed to downside risks as weaker macroeconomic prospects make them vulnerable to spillovers from the European debt crisis. Authorities in advanced countries will need to address banking issues, make necessary adjustments without a large impact on growth prospects. Policymakers in other areas may need to address issues relating to funding and credit strains, especially if global growth continues to stall
For more information on this follow the link: www.imf.org/external/pubs/ft/fmu/eng/2012/01/index.htm
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