Global financial markets show progress, but risks remain

Washington: While global financial markets and confidence in an economic recovery have improved, the International Monetary Fund (IMF) said risks remain and policymakers must be vigilant until a sustained recovery takes hold.

"In spite of these improvements there are areas of concern," Jose Maria Vinals, Director of Monetary Affairs and Capital Markets at the IMF, said in a statement accompanying the fund's analysis of the global financial system.

"The deleveraging process is still continuing, banks' balance sheets still continue to be put under pressure as a result of the expected bank writedowns that will come out," Vinals said.

Credit risks remain high, bank lending to the private sector is slowing and the recovery so far has depended primarily on public funds, said the Washington-based lender, which has shored up economies from Iceland to Pakistan in the past year.

The fiscal and monetary policies implemented worldwide have lowered the risk of another systemic failure on the scale of Lehman Brothers Holdings Inc, the IMF said.

The IMF did not update figures in a similar report from April in which the lender forecast worldwide losses tied to distressed loans and securitised assets may reach $4.1 trillion (Dh15 trillion) by the end of next year.

That same report said about $1 trillion of the amount has already been reflected in bank writedowns.

"Overall writedowns should be somewhat smaller than the ones we had in April," the IMF's Vinals told reporters today at a briefing in Washington.

He said estimates for losses will be published in September, adding that while "there has been a significant return of risk appetite" since April, markets should not "get too far ahead from the economic reality".

Stocks and Treasuries rose, as the IMF released a separate report at the same time which boosted the lender's forecast for global economic growth next year.

The Standard & Poor's 500 Index gained 0.3 per cent to 883.80 as of 9:56 am on Thursday in New York.

The yield on the benchmark 10-year government note slipped to 3.44 per cent from 3.46 per cent late on Thursday. The IMF report reiterated that fixing banks' balance sheets is a "prerequisite" for economic recovery.

The US pumped capital into banks through the $700 billion (Dh2.5 trillion) Troubled Asset Relief Programme (Tarp), enacted last year.

Some banks have paid back funds they received under Tarp, and about $127 billion (Dh466 billion) of the rescue fund is available for future use if needed, Treasury Secretary Timothy Geithner said this week.

The IMF's April report said US bank losses at the end of last year totalled $510 billion (Dh1.8 trillion), with additional writedowns of $550 billion (Dh2 trillion) expected through 2010.

The projections excluded government-sponsored enterprises. The IMF said while further write-downs are likely, higher-than-expected earnings and stress tests for banks, along with successful efforts to raise capital, have "bolstered" confidence in US banks.

"However, loss ratios are expected to continue to rise for loans," the report said.

The fund made a similar assessment of European banks, adding that while loss rates are likely to increase, stress tests by the Committee of European Banking Supervisors "should help to reestablish market confidence."