Anthony Rowley; In Tokyo
THE global financial system has moved 'deeply into the danger zone', the IMF warned in a report published last night while calling for the establishment of some kind of 'gatekeeper' mechanism to prevent panic deleveraging of assets by banks in Europe and elsewhere as they seek to shore up capital ratios.
This warning in the IMF's latest Global Financial Stability Report came as the Washington-based financial institution also slashed its growth forecast for the global economy in 2012, following the example set last week by the World Bank.
'Financial conditions have deteriorated, growth prospects have dimmed and downside risks have escalated,' the IMF said in a World Economic Outlook Update, adding that 'the global economy is threatened by intensifying strains in the euro area and fragilities elsewhere'.
In a third report called the Fiscal Monitor Update, also published last night, the IMF further warned that national fiscal policy will have to 'walk a narrow path' in many countries 'as downside risks rise'.
The IMF has downgraded its forecast for global economic growth this year from the near 4 per cent it forecast last September to 3.25 per cent now, chiefly because of the continuing problems in the eurozone.
This is not as severe as the forecast issued last week by the World Bank, which dramatically cut its forecast for global economic growth in 2012 from 3.6 per cent to 2.5 per cent, mainly in the light of problems in the eurozone.
Advanced economies are expected by the IMF to grow at just 1.2 per cent in 2012 compared with 1.6 per cent last year while emerging and developing economies are likely to see just 5.4 per cent growth this year compared to 6.2 per cent in 2011. Even China is forecast to see its growth rate fall to 8.2 per cent in 2012 from 9.2 per cent last year.
But the IMF reserved its strongest warning for what it sees as risks in the global financial system as bank deleveraging poses a mounting threat of contagion across the advanced and developing economies.
'The US and other advanced economies are susceptible to spillovers from a potential intensification of the euro area crisis,' said the IMF, while adding that emerging Europe and other emerging economies are at risk of contagion from the eurozone crisis.
Actions taken so far in the eurozone have helped to improve financial market sentiment but 'sovereign financial conditions remain challenging and downside risks remain', the IMF said.
Chief among these risks is a further round of deleveraging by leading banks in the light of the 'funding challenges' they are facing. 'Public funding should be made available as a backstop' to efforts by banks to raise private capital, the IMF said.
'There needs to be a pan-euro-area facility with the capacity to take direct stakes in banks there,' it suggested.
Meanwhile, a 'macro-prudential gatekeeper' is needed to ensure that deleveraging plans are consistent with sustaining the flow of credit to support economic activity.
A parallel risk to bank deleveraging on the part of banks is the danger of governments tightening fiscal policy unduly, the IMF said. 'Governments should avoid responding to any unexpected downturn in growth by further tightening policies.'
'Countries with fiscal space, including some in the euro area, should reconsider the pace of near-term adjustment' while others such as the US and Japan 'need to clarify their medium-term debt reduction strategies', the IMF said.