IMF criticizes debt crisis response by US, Europe
WASHINGTON - Nearly half of the euro area’s $9 trillion in outstanding government debt is “at heightened credit risk,’’ the International Monetary Fund said yesterday in a report that slams leaders of the developed world for their lack of action on public debt and outlines the potentially devastating fallout if the problem widens.
Already, the IMF estimated, the rising threat of losses on the bonds of a half-dozen countries - Greece, Portugal, Ireland, Italy, Spain, and Belgium - represents an implicit cost to banks of around $240 billion.
With so much total debt outstanding, and markets worried that a large country such as Italy may need a bailout that Europe and the IMF can’t afford, the situation has caused investors to steadily abandon weaker countries. The pullback is making it hard for those nations’ banks to operate and for their economies to grow, the IMF said in its latest Global Financial Stability Report, which assesses risks to the financial system.
The common euro currency has made matters worse, letting investors jump from Greece or Portugal to havens such as Germany or the Netherlands without having to do an expensive currency conversion or worry about fluctuations in exchange rates, the report said.
The IMF concluded that the global financial crisis is now in a “political phase’’ that has stretched the ability of leaders in developed countries to come to terms with years of overspending, unaffordable entitlements, and critical economic reform.
In a broad criticism of politicians across the Western hemisphere - from the Obama administration and Congress to the heads of the 17 euro zone nations - the fund said investors are losing hope that officials will make the decisions needed to make public debt sustainable and reinvigorate their economies.
“The crisis - now in its fifth year - has moved into a new, more political phase,’’ the IMF said. “As political leaders in these advanced economies have not yet commanded broad political support for sufficiently strengthening macro-financial stability and for implementing growth-enhancing reforms, markets have begun to question their ability to take needed actions.’’
High government debt in Europe has cast doubt on whether its banks can withstand losses if a government such as Greece defaults on its international loans. Banks in Europe are major holders of government bonds.
The $240 billion does not represent an actual loss or an estimate of how much capital European banks might need. Rather it is a calculation that converts the rising risk that markets have associated with the bonds from the six higher-risk countries into a “price’’ for bank holdings of bonds from those countries.