IMF – Global Financial Stability Report Grappling with Crisis Legacies

World Economic and Financial Surveys – Global Financial Stability Report – Grappling with Crisis Legacies, September 2011. International Monetary Fund.

“Financial stability risks have increased substantially over the past few months. Weaker growth prospects adversely affect both public and private balance sheets and heighten the challenge of coping with heavy debt burdens. Public balance sheets in many advanced economies are highly vulnerable to rising financing costs, in part owing to the transfer of private risk to the public sector. Strained public finances force policymakers to exercise particular care in the use of fiscal policy to support economic activity, while monetary policy has only limited room to provide additional stimulus. Against this backdrop, the crisisnow in its fifth yearhas moved into a new, more political phase. In the euro area, important steps have been taken to address current
problems, but political differences within economies undergoing adjustment and among economies providing support have impeded achievement of a lasting solution. Meanwhile, the United States is
faced with growing doubts over the ability of the political process to achieve a necessary consensus regarding medium-term fiscal adjustment, which is critically important for global stability. As political leaders in these advanced economies have not yet commanded broad political support for sufficiently strengthening macro-financial stability and for implementing growth-enhancing reforms, markets have begun to question their ability to take needed actions. This environment of financial and political weakness elevates concerns about default risk and demands a coherent strategy to address contagion and strengthen financial systems.”

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