IMF Says Government Debt Poses Biggest Risk to Growth (Update1)
By Sandrine Rastello
April 20 (Bloomberg) -- The International Monetary Fund cautioned that rising government debt has replaced financial industry stress as the biggest threat to the global economy and cut its estimate for asset writedowns by 19 percent.
Banks reduced the value of loans and securities by $2.28 trillion since 2007, two-thirds of which had been realized by the end of 2009, down from the IMF’s October estimate of $2.81 trillion, the fund said today in its Global Financial Stability Report. About 39 percent of the writedowns were in U.S. banks, 29 percent in the euro area and 20 percent in the U.K., the IMF said.
The cost of insuring Greek sovereign debt against default surged to a record yesterday and the premium investors demand to buy 10-year Greek government debt over benchmark German bunds rose to the most since before the euro’s debut.
“Longer-run solvency concerns could translate into short- term strains in funding markets as investors require higher yields to compensate for future risks,” the IMF said.
“Greece is a wake-up call,” Jose Vinals, director of the IMF’s monetary and capital markets department, told reporters at a briefing in Washington yesterday. “In all the other countries, which fortunately are in a better situation, what we are saying is ‘do not let the financial situation get out of hand and undertake the necessary measures precisely to remain on the safe side.’”
In Asia, a “booming” real estate market poses “risks to financial stability as banks are increasingly vulnerable to a price correction,” the report said. Most mortgage loans in Asia have floating rates, a factor the IMF said may mean “the widely anticipated rate hikes in the region will increase the burden on household balance sheets.”
“Moreover, as many municipal budgets in China tend to rely heavily on revenue from land sales, a real estate market downturn may put their fiscal situation into question,” the report said.