'Address medium-term issues to sustain financial market rally'
Washington: Despite improvement in global financial stability in the past six months, an IMF study has warned that if progress on addressing medium-term challenges falters, rally in financial markets may prove unsustainable.
"Global financial stability has improved since the October 2012 report", said the latest Global Financial Stability Report (GFSR) of the International Monetary Fund released today.
"Policy actions have eased monetary and financial conditions and reduced tail risks, leading to a sharp increase in risk appetite and a rally in asset prices," said the report released at the IMF headquarters here.
"But if progress on addressing medium-term challenges falters, the rally in financial markets may prove unsustainable, risks could reappear, and the global financial crisis could morph into a more chronic phase," it said.
The GFSR concludes that improved financial markets and gains in financial stability will not be sustained?-and new risks are likely to emerge?-unless policymakers address key underlying vulnerabilities, Jose Vinals, IMF Financial Counsellor, told reporters here.
Vinals said in euro area, policymakers averted a financial cliff and in the United States, the worst fears of the fiscal cliff had been averted, while balance sheet repair and continued monetary easing have supported financial markets and the recovery.
"In Japan, new policy initiatives have caught the imagination of global markets that Japan may finally leave its deflation valley," he added.
Vinals said the euro area still needs to be fixed.
"Despite the substantial improvements in market conditions, credit is not adequately flowing in the euro area periphery.
"The periphery corporate sector is also facing a sizeable debt overhang, which was built up before the crisis, he said.
"The GFSR identifies a weak tail of companies that need to reduce their debt over time", he added.
"The required debt reduction by these companies accounts for a fifth of the total debt of periphery corporates in our sample.
"This poses a challenge to their economies and financial stability," Vinals added.
In the United States, policymakers need to keep banks safe, he said, adding as far as non-banks are concerned, they must be vigilant and proactive by restraining too rapid increases in leverage and by encouraging prudent underwriting standards.
All this requires appropriate macroprudential policies, he noted.
"Emerging market economies must keep the guard up against deteriorating bank asset quality and disruptive short-term capital flows.
"At the same time, prudential policies should be deployed to ensure adequate buffers in the financial system and to prevent the excessive build-up of leverage and asset price bubbles," Vinals said.