IMF Says Financial Conditions Improving but Risks Remain

The International Monetary Fund says financial conditions have improved in the last three months, as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. “Nonetheless, vulnerabilities remain and complacency must be avoided, ” the IMF says in a Market Update.

“The financial sector continues to be dependent on significant public support, resulting in an unparalleled transfer of risk from the private to the public sector. At the same time, however, work will need to begin on exit strategies from the various financial, monetary, and fiscal support policies in order to address market uncertainty. Medium-term policies need to ensure that steps taken to normalize policies and markets are consistent with establishing a lasting framework of sound financial regulation, sustainable fiscal balances, and the maintenance of price stability.”

The risk of a widespread banking crisis has eased and prospective writedowns on securities are likely to be somewhat lower, as a result of the recovery in mark-to-market valuations, but bank capitalization still remains a concern as further writedowns on loans are expected.