IMF warns banks still pose threat as currency war looms

City A.M. Reporter
SOVEREIGN debt risk in Europe and continued real estate woes in the United States have dealt a setback to global financial stability in the past six months, the International Monetary Fund said yesterday.

The IMF said risks to the financial sector could be reduced if legacy problem assets were cleaned up, if governments improved their fiscal positions and if more clarity were provided on global financial regulation.

“The global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery,” the IMF said in its twice-yearly Global Financial Stability Report.

“The recent turmoil in sovereign debt markets in Europe highlighted increased vulnerabilities of bank and sovereign balance sheets arising from the crisis,” the fund said.

The IMF said it trimmed its estimate of total global bank write-downs related to the financial crisis between 2007 and 2010 to $2.2 trillion (£1.38 trillion) from its April estimate of $2.3 trillion.

Separately, the head of the International Monetary Fund warned yesterday that countries risked undermining the global economic recovery if they sought to use their currencies to boost domestic growth.

“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Dominique Strauss-Kahn told the Financial Times. “Translated into action, such an idea would represent a very serious risk to the global recovery.”