According to a recent report released by
the IMF, significant changes in policies and a small jump in recovery rates has
seen the global financial system with much less risks than a year ago.
The six monthly Global Financial Stability
Report (GFSR) released in August does warn that there is a long road to travel
until full recovery, however, and governments will need to continue to be stern
in their policy actions.
The Director of the IMF’s Monetary and
Capital Markets Department José Viňals commented, “I would say that there are
some very encouraging signs, but we are not out of the woods yet.”
Risks are likely to rear their ugly heads
again should banks fail to do something about their balance sheets. Without
that, they will be unable to provide the loans necessary to support solid financial
recovery.
Viňals added, “It’s vital we face the
on-going challenges today rather than putting them off. If we don’t act
decisively and quickly we will lose the recovery traction we have gained so
far. We can’t afford to let that happen. The upturn must continue steadily.”
Markets
steadying
Wide spread monetary easing techniques by
many governments has allowed the steadying of bank balance sheets and in general
stabilized the rocky economic system. A knock on effect has been a rebound in
stocks and other risk assets.
Emerging economies, especially in Latin
America and Asia, have also benefitted from the new found stability in the core
markets. Tail risks have been reduced due to the lending capabilities of the
IMF.
The report said that in order to sustain
this kind of recovery, there was need for a concerted strategy to ground
sentiment and mitigate the formation of systemic risks.
Commenting on the report, Stuart Poulson,
Head of Corporate trading at Nikko-Desjardins Asset Management said “The
markets have improved, that’s true, but we don’t want that to result in a
widespread loss of urgency and for markets to lapse. A complacent attitude
would be disastrous at this stage. We need to go forward with the recovery
boldly.”
It is widely thought the danger of a full
banking collapse has now been averted with huge recovery of earnings and
funding being reopened to financial institutions. The GFSR data reveals there has
been a huge drop in write-downs from bad assets, by more than $500 million in
the last semi-annual period.
