Thursday, April 19, 2012

The IMF Is Worried

The IMF's annual Global Financial Stability Report is entirely devoted to the parlous state of European finances and particularly to the weakness of European banks. According to the report, those banks will be obliged to "deleverage," that is, reduce the ratio of loans to equity, by €2.6 trillion over the coming year, a bit more than the GDP of France. They will do this by selling assets and reducing lending, and how they go about this will determine how much of a brake on European economic activity will be applied. The combination of reduced lending with reduced spending by governments enforced by the Sarkozy-Merkel agreement is a recipe for a fairly severe recession. It is therefore imperative to rethink the Merkozy accord before it is too late. François Hollande's election could provide an impetus for this, but it is difficult to assess whether Germany is prepared to change course. We shall see, but I fear that, even though German thinking is evolving, change is coming too slowly to avert disaster.

If you don't have the patience to read the report, see the executive summary here.

No comments:

Post a Comment