IMF Euroland warning

Wednesday, 13 April 2011 09:46

The 187-nation IMF warned of a looming funding challenge for both banks and countries struggling with sovereign debt problems. As a result of the global financial crisis banks have had to raise both the quantity and quality of capital, yet it has been uneven as European banks are generally lagging behind US banks.

Europe will not escape, IMF economists said a restructuring of failing banks and a recapitalization of viable banks. They also added that that some of the capital will need to come from public sources.

The Washington-based Fund said financial institutions could build capital by reducing dividend payout ratios and retaining a greater proportion of earnings. Another possible measure would be a gradual downsizing of balance sheets to reduce capital and funding needs.

Such moves could help avert fire sales of assets, which would only intensify problems in the global financial system. Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years. Irish and German banks are exposed to acute rollover requirements.

Heavy debt burdens weigh on economic activity and threaten financial stability by making balance sheets more fragile. When debt is at high levels, its sustainability becomes increasingly sensitive to changes in funding costs and rollover rates.