News Column

Euro Crisis Could See Banks Sell off Trillions in Assets

October 10, 2012
Euro Debt

The International Monetary Fund (IMF) warned Wednesday that European banks might have to sell 2.8 trillion dollars of assets unless eurozone policymakers resolve the sovereign debt crisis.

The amount could go as high as 4.5 trillion dollars if the crisis intensifies, the IMF said.

"We find that delays in resolving the crisis have increased the expected amount of asset shrinkage at banks," the international lender wrote in its twice-annual Global Financial Stability Report.

The IMF said in its previous report in April that eurozone policymakers need to build on improvements and avoid fresh setbacks in their sovereign debt crisis, but the October report urged "more speed is needed now."

Capital is moving from troubled eurozone countries, such as Spain and Italy, to more economically stable ones or out of the euro area altogether, the IMF said.

"The resulting capital flight and market fragmentation undermine the very foundations of the union: integrated markets and an effective common monetary policy," the IMF warned.

The eurozone crisis remained the key threat to global financial stability, the IMF said.

Despite new steps taken by European policymakers, "confidence has not yet been sufficiently restored, and concerns about financial stability in the euro area remain elevated," the IMF said.

The eurozone crisis has generated safe-haven flows to other regions, especially the United States and Japan, and the flows have pushed the funding costs of government debt to historical lows, facilitating easy financing for their high debt, the IMF said.

The lender said the two countries, the world's largest and third-largest economies, continued to face significant fiscal challenges and warned Japan of a debt crisis similar to the one in the eurozone.

"The present difficulties in the euro area provide a cautionary tale for Japan, given the latter's high public debt load and interdependence between banks and the sovereign [debt crisis] that is expected to deepen over the medium term," the report said.

"Safe-haven flows have also driven the yen exchange rate to near historic highs, impacting Japanese exports and domestic production," the report added.

A higher yen makes Japanese products more expensive abroad and reduces repatriated earnings.

Emerging markets have managed to navigate through global shocks so far but need to guard against further potential jolts from the eurozone crisis while Asian and Latin American economies seem more resilient, the IMF said.

"The key lesson of the past few years is that imbalances need to be addressed well before markets start flagging credit concerns," the IMF said.

On Tuesday, the IMF downgraded its global economic growth forecast to 3.3 per cent for 2012 from a July projection of 3.5 per cent and 2013's prediction to 3.6 from 3.9 per cent while warning that growth would be cut further if European and US officials fail to stem their economic crises.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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