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.
