Britannia Radio

From Times Online

April 21, 2010

Sovereign debt rise poses new threat to global economy

Carl Mortished, World Business Editor

Rising government debt is creating new risks to global financial stability, the IMF has warned. It said that the increase in sovereign debt would put new pressure on lending markets just as the world’s banks try to refinance about $5 trillion in short-term borrowings.

However, the fund has cut its estimate of the cost to the banks of the global financial crisis by $500 billion.

Signs of improving health in the world economy have encouraged the IMF, in its Global Financial Stability Report, to cut its estimate of bank writedowns to $2.3 trillion, from a reckoning in October last year of $2.8 trillion.

In Britain, loan loss provision has been revised down by the IMF by $99 billion (£64.5 billion) to $398 billion, reflecting lower expectations of mortgage losses. The UK housing market collapse was worse than expected, the fund said, pointing to a peak-to-trough decline of more than 40 per cent.

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The picture is spoilt by worsening sovereign risk that could prolong the credit drought in the absence of healthy bank and household balance sheets, the IMF said. It fears that sovereign funding crises in Greece will spread across borders and into the wider economy.

The world’s banks need to refinance their liabilities with $5 trillion in borrowings expected to mature over the next 36 months, according to José Vinals, director of the IMF monetary and capital markets department. “The funding pressures that banks are going to be facing over the next couple of years have to do with the fact that during the crisis banks had to issue shorter-term debt. This debt is now coming to maturity,” he said.

The IMF has rejected calls for a ban on trading in “naked” credit default swaps, saying that it would be counter-productive. The instruments were created to let investors insure bonds against the risk of default by an issuer. European governments have accused investors of betting on the risk of a Greek default, turning their ire against investors in credit default swaps who did not own underlying bonds.