The eurozone’s creaking banking system poses a serious threat to global financial stability, according to the International Monetary Fund which warned European leaders to accelerate plans to support weak banks and create a banking union.
In a report that forecasts a “goldilocks” outcome of stable growth, IMF financial counsellor José Viñals said the end of low interest rates in the US, coupled with a failure by the Obama administration to monitor risky lending, a sharp slowdown in China and disruption to emerging markets could all upset expectations of a smooth recovery.
“Can the US make a smooth exit from unconventional policies? I call this the ‘Goldilocks exit’ – not too hot, not too cold, just right.
This is our base line, most likely outcome. After a turbulent start, the normalisation of monetary policy has begun. But a bumpy exit is possible.”
He said the eurozone’s incomplete repair of bank and corporate balance sheets continued to place a drag on the recovery, while the widening gap between Germany and the poorest of the 18 member states was restricting the flow of funds around the currency zone and hampering the growth of smaller businesses. “Thus, further efforts must be made to strengthen bank balance sheets, through the European comprehensive bank assessment and follow-up, and to tackle the corporate debt overhang,” he said.
The IMF, which published the global financial stability report on Wednesday, acts as lender of last resort to bankrupt countries and is one of many economic organisations to worry about the effects on global growth of the US attempting to behave as if the recovery is complete when many countries are still struggling to cope with the aftershocks.
