Financial stability

Just a year ago the global financial system was on the brink of a meltdown. Since Wall Street giant Lehman Brothers declared bankruptcy last year in September, trillions of dollars have been pumped into markets by an unprecedented series of government stimulus packages. The US alone provided a US$700 billion (478 billion euros) to rescue the country's ailing banks.

Today the biggest bailout in history appears to have paid off: risks to the global financial system have subsided and the global economy is beginning to show signs of recovery. That's the bottom line of the International Monetary Fund's latest Global Financial Stability Report, which was presented at a key conference of the IMF and the World Bank Group in Istanbul on Wednesday.

"The world economy is on the road to recovery, but this does not mean that risks have disappeared," Jose Vinals, Director of the IMF's Monetary and Capital Markets Department, pointed out.

For both banks and other financial institutions, the IMF study calculates that actual and potential write-downs from bad assets such as loans and securities have fallen by some $600 billion over the past six months - from about $4 trillion to a still staggering $3.4 trillion. But the report also warns that so far only about half of all toxic and impaired assets have been written off by banks in Europe and the United States.

Tight credit threatens rebound

The IMF says the biggest threat to a sustainable recovery of the global financial system is that wary banks with tougher lending rules will hamper economic expansion.

Jose Vinals puts it this way: "If we fail to meet the challenges still being faced by the financial system in the present crisis, we risk reigniting systemic risks and even derailing the economic recovery."

At their meeting in London last April the leaders of the Group of 20 nations, the G-20, pledged to contribute an extra $500 billion to the IMF's 'New Arrangements to Borrow' (NAB) program. This money will be used in particular for emerging market economies, which are increasingly feeling the pain of a credit crunch.

Another key challenge, the IMF indicates, is to find the right balance between policy intervention and the withdrawal of support by governments. Experts say the markets seem to be counting on the steady supply of cheap money provided by central banks with record-low interest rates, and therefore warn that a new market bubble is already in the making.

So the IMF is sending mixed signals from Istanbul: "The good news is that bank's capital positions and earnings have substantially improved since the last Global Financial Stability Report, and significant capital has been raised."

If the question were whether banks have enough capital to supply sufficient credit to support the recovery, the IMF believes that the answer is "no".

IMF director Jose Vinals admits that policymakers and financial institutions around the globe are exploring new territory as they fight the biggest financial crisis in 80 years.

Or as Vinals himself puts it: “There is no silver bullet to save financial markets.”

Report: Thomas Kohlmann, Istanbul
Editor: Sam Edmonds