Cause and Effect in European Politics and Law

IMF: the crisis will broaden to include-households

Adelina Marini, April 21, 2009

After couple of encouraging news about well performing companies like the British supermarket chain "TESCO", the International Monetary Fund poured cold water over the hopes for close going out of the global recession. In its report about the Global Financial Stability, published today, the Fund says that "the global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries". According to the experts of the IMF, the biggest challenge that the world will have to face is the breaking the downward spiral between the financial system and the global economy.

The main problem, according to the report, is that banks still need a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity.

Another problem is that a wider range of non-banking institutions have come under pressure because of the fall of asset prices. The pension funds are among the hit hardest by the crisis because their assets have rapidly declined. Many insurance companies suffer problems as well and in some cases there's a depletion of their regulatory capital surpluses.

IMF recommends urgent implementation of the already negotiated measures, pointing out on the political will for action because, the report says, any political hesitation might lead discourage the private sector to engage constructively in the search of solutions. Another recommendation is full transparency of the accounting sheets of the banks with problems.

The recommendations of the Fund cover almost entirely the measures, decided by the G20 leaders in London a month ago. In fact, this summit gave more money to the IMF, thus increasing its role as a leading international financial institution which hasn't yet lost the confidence of markets and governments.