08 April 2008

IMF warns against broadening credit crisis

The widening and deepening fallout from the U.S. subprime mortgage crisis could have profound financial system and macroeconomic implications, according to the IMF's latest Global Financial Stability Report (GFSR).

At present, the issuance of most structured credit products is at a standstill and many banks are coping with losses and involuntary balance expansions, the April 2008 report said. The report examines this and other forces that could push the current credit crisis into a full credit crunch, as well as offering policy recommendations to mitigate the impact.

"Financial markets remain under considerable stress because of a combination of three factors," said Jaime Caruana, head of the IMF's Monetary and Capital Markets Department. "First, the balance sheets of financial institutions have weakened; second, the deleveraging process continues and asset prices continue to fall; and, finally, the macroeconomic environment is more challenging because of the weakening global growth," he added.

The crisis has weakened the capital and funding of large systemically important financial institutions, raising systemic risks, the report said. The continued stress increases the downside risks for global financial stability and potentially forces institutions to further curtail credit, it added, noting that the macroeconomic effects could be severe.

Even though the United States remains at the "epicenter," financial institutions in other countries have also been affected by the current market crisis, "reflecting the same overly benign global financial conditions, an inattention to appropriate risk management systems, and lapses in prudential supervision", the report states

Press release

Full Text of the GFSR

Executive Summary

© Graham Bishop