IMF Sees Financial Crisis 'Chronic Risk'

The financial crisis which has beset the world economy in recent years is at risk of becoming "chronic", the International Monetary Fund has warned.

In its Global Financial Stability Report, the IMF said that although the immediate risks to the international banking system had abated, governments – particularly in the UK and euro areas – needed to do more to bring it back to full health.

The warning comes a day after the Fund’s chief economist, Olivier Blanchard, warned that George Osborne was "playing with fire" with his economic policy.

The report said: "The global financial crisis could morph into a more chronic phase, marked by a deterioration of financial conditions and recurring bouts of financial instability."

Part of the problem is that many banks still have yet to clear bad debts off their balance sheets and undertake reforms to increase their buffers against future crises, the Fund added.

It said: "What is needed now is a renewed political commitment at the global and national level to complete the reform agenda.

"This commitment is critical to minimise regulatory uncertainty and arbitrage, and to reduce financial fragmentation.

"Without greater urgency toward international cooperation and comprehensive bank restructuring, weak bank balance sheets will continue to weigh on the recovery and pose ongoing risks to global stability."

One issue in particular is that central banks, including the Bank of England, have carried out so much quantitative easing, stimulating the economy, that this could both mask the pressures facing families and companies, and to generate a new bubble in financial markets.

The report said: "A prolonged period of extraordinary monetary accommodation could push portfolio rebalancing and risk appetite to the point of creating significant adverse side effects."

The Bank of England Governor, Sir Mervyn King, last night presented figures to a meeting on the fringe of the IMF summit showing that its balance sheet had expanded by more than any other central bank’s since late 2007.

The IMF report warned that euro periphery banks faced a large overhang of debt which they will struggle to finance – equivalent to up to a fifth of their total owings – with much of this in Spain and Portugal.

It added: "While major UK and core euro area banks have been actively de-risking and deleveraging—as is discussed below—more needs to be done to complete the repair of their balance sheets."

It said that the levels of risk facing the macro-economy, emerging markets, the credit system and the markets more widely had diminished significantly in the past six months.

However, the level of risk appetite had increased sharply, as had the level of monetary stimulus around the world, reflecting the unprecedented amount of money pumped into the system by central banks.