Public debt is latest threat to international recovery -IMF
THE state of the public finances in major economies is the newest threat to the financial system, the International Monetary System (IMF) says in its latest Global Financial Stability Report.
Although the global financial system and the world economy are slowly regaining their health, there is a danger that the sharp rise in government debt during the economic crisis will feed back into lower growth and more problems for the banks.
"Even with weaker private credit demand, governments could crowd out business and household borrowers, retarding recovery," the twice-yearly report warns.
"If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the very real risk of undermining the recovery and extending the financial crisis into a new phase," the report says.
In an analysis of the widening of the cost of government debt in the euro area, IMF economists say country-specific developments have been the main driver since October last year.
"A closer look for each period in the crisis shows that earlier, the sources of contagion could be found among those countries hit hard by the financial crisis, such as Austria, the Netherlands and Ireland; whereas more recently the countries putting pressure on euro area sovereign bonds were primarily Greece, Portugal, and Spain, as the emphasis shifted towards short-term refinancing risk and long-term fiscal sustainability," the report says.
lIn a statement last night the IMF said it is proposing a double-tax regime for banks that would fund future bailouts and penalise both the profits and pay of lenders.
The proposal emerged yesterday in a leaked confidential document prepared for the G20 meeting of finance ministers to be held this week in Washington. The IMF wants two separate taxes on banks to address the huge burden of support after the 2008 financial crash. According to the fund, unrecovered costs of bank rescues in the most affected G20 countries represent 4-5pc of GDP.