FRANKFURT (MNI) – Executive directors at the International Monetary
Fund (IMF) welcomed the intention of Eurozone authorities to conduct
transparent stress tests on the area’s banking sector, the IMF staff
said in a report published on Wednesday.
In the report on the IMF’s 2010 Article IV on euro area policies,
the staff noted that Eurozone bank capitalization had broadly increased
this year. “However, in an international perspective, euro area banks’
capital buffers remain low and profit retention will be paramount, much
like it was in 2009,” IMF staff said. The report also noted uncertainty
regarding the level of capital that would be adequate, as well as its
quality.
IMF staff warned that a threat to financial system recovery could
come in the form of underperforming banks, which could lead to
segmentation of money and bank funding markets. “Moreover, the
performance of banks may come under further pressure from increased risk
premiums, heightened market uncertainty, reduced government support, and
loan-loss provisioning continuing at very high levels,” the report said.
The IMF report also highlighted growing concern regarding bank
lending constraints, which could hinder Eurozone growth significantly.
Still, authorities felt that systemic risks within the financial sector
had diminished.
While actions to address bank sector weakness are already underway
in some states, the report noted that in other countries, such as
Germany, measures had yet to be implemented and warned that voluntary
actions would unlikely be sufficient.
“Furthermore, a number of banks, including some mid-size ones,
remains heavily reliant on ECB financing facilities or on government
support,” the report read. As a result, IMF staff agreed that some
measures would need to be extended. However, they also warned that
restructuring actions not be put off “and competition not distorted.”
Regarding sovereign debt, the IMF staff report called the crisis “a
wake-up call” for the monetary union, noting that it had been caused by
“unsustainable policies” in some member states, with “significant
spillovers” likely to result.
IMF directors noted that heightened sovereign risks “have imparted
further downside risks to an already moderate and uneven recovery,” the
report continued.
Over the medium term, they saw “fiscal consolidation and structural
rigidities weighing on the recovery, only partly offset by the recent
depreciation of the exchange rate to a level that is now close to its
fundamental value.”
IMF staff also stressed that those countries facing “severe
financial market stress” had no choice but to undertake immediate fiscal
adjustment.
“Nevertheless, the staff emphasized that countries with manageable
debt dynamics can maintain their current plans in the context of
credible medium-term adjustment programs. As a result, with the
considerable near-term fiscal easing in Germany, the overall fiscal
stance in the euro area would remain broadly neutral in 2010.
Turning to growth, IMF staff noted that recent indicators were
consistent with a “relatively strong second quarter in 2010, driven by
the global recovery in trade and manufacturing, and some slowing of
momentum during the second half of 2010.”
At the same time, disinflationary pressures persist given weak
domestic demand, while the “sizeable” output gap is shrinking only
“gradually,” the IMF observed.
Thus, “staff projects inflation to remain well below 2 percent over
the relevant policy horizon.”
–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com
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