Europe banks, emerging markets pose risks: IMF

April 13, 2011, 9:01 a.m. EDT

Europe banks, emerging markets pose risks: IMF

By Steve Goldstein, MarketWatch

WASHINGTON (MarketWatch) — The risks to global financial system stability remain elevated due to the debt problems for European nations and banks as well as inflows into emerging markets, a major International Monetary Fund report concluded on Wednesday.

The IMF’s Global Financial Stability Report said the improving global economy has helped reduce risks to stability since the group last produced a report in October, and accommodative monetary and financial conditions have helped ease balance-sheet strains.

But the IMF report, released ahead of the spring meeting of the organization, said balance sheets are still frail.

“Even nearly four years since the onset of the financial crisis, balance sheet fragilities continue to pose key downside risks to global financial stability and the economic recovery,” the report said. The rise of oil prices also could pose risks.

The report said European banks have lagged their U.S. counterparts in raising capital and made less progress in lengthening the maturity of their funding. Not that the U.S. is out of the woods either — “the weak housing market is likely to extend the household deleveraging process, slowing the economic recovery and weighing on bank balance sheets.”

In emerging markets, risks have declined due to still-buoyant growth but the increase in leverage, rising asset valuations and growing inflationary pressure “raise concerns about the gradual buildup of imbalances, calling for increased vigilance by policy makers and adroit use of policy tools.”

Steve Goldstein is MarketWatch's Washington bureau chief.

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