The International Monetary Fund (IMF) stated credit losses have continued to grow, most being borne by banks but government action is gradually beginning to restore market confidence. Decisive policy actions are required, particularly on bank cleanup and recapitalization.
The IMF further stated that an unprecedented policy response to the global economic crisis, including the recent expansion of resources for international institutions and the IMF’s enhanced lending framework, is gradually beginning to restore market confidence.
However, the IMF’s semiannual Global Financial Stability Report (GFSR) released on April 21 warned that the challenges to restoring financial stability remain significant. “Continued decisive and effective action is needed to preserve and strengthen these first signs of improvement and to help provide a more stable and resilient platform for sustained global growth,” José Viñals, Financial Counselor and Director of the IMF’s Monetary and Capital Markets Department, said.
The report said that in particular, emerging market risks have risen the most in the past six months.
The retrenchment of capital flows is straining economies that have relied on foreign-financed credit growth while the deteriorating economic environment has increased expected bank writedowns and raised the need for fresh capital in emerging market banks, Viñals told reporters.
Emerging markets feel the impact
As institutions reduce assets during a period of deleveraging, international capital flows to emerging markets have been curtailed. The effects have been harsh in some cases. The retrenchment from cross-border markets is outpacing the overall deleveraging process. On balance, emerging markets could experience net outflows of private capital in 2009, with but slim chances of recovery in 2010 and 2011. Banks in countries which are dependent on such cross border flows have suffered greatly but the effects are also being felt by companies in many emerging markets.
Within emerging markets, eastern European economies have been the hardest hit. The linkages between western Europe and emerging European banking systems make the region particularly vulnerable. Western European banks may reduce the funding of their eastern European subsidiaries and losses from emerging Europe may damage western European balance sheets. Fortunately, there are promising regional initiatives in which some western banks have agreed to keep credit flowing to the subsidiaries.
In response to the widespread nature of the crisis, the IMF overhauled its lending framework and at its summit in London on April 2, the Group of 20 industrial and emerging market countries supported a large expansion of the Fund’s resources – from US$250 billion to US$750 billion. The changes in the IMF’s lending framework include more emphasis on crisis prevention, facilitating larger and more frontloaded financing and further streamlining conditions attached to IMF loans. |
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