The good news from the IMF April Global Stability Report is that worldwide bank write-down should be $2.3 trillion and not the $2.8 trilion that the agency estimated last October. The IMF said that the improvement was due to the improvements in financial markets and the economy. The temptation is to make the better situation of the banks the headline instead of a footnote. Much of what the IMF has to say elsewhere in the report was menacing.

The major negative analysis points to the “deleveraging” problem in the global financial system is far from over. Weak banks which took on huge financial obligations that they could ill-afford to cover are still zombies roaming the credit system

The other contention of the report is that sovereign debt has taken on the role of the riskiest game in town as the danger in the banking system as devolved. The report says”recently, spreads have widened in some highly indebted economies with underlying vulnerabilities, as longer-run fiscal sustainability concerns have telescoped into strains in sovereign funding markets that could have cross border spillovers”. In other words, the debt problems in Greece are not a Greek problem; they are trouble for the entire Eurozone, even strong economies like German.

The analysis by the IMF makes common sense. Bank and financial firm risks can be regulated by governments, if legislators chose to do so. Whether that is in the form of the bank tax being discussed in Europe to cover the costs of any large failed institutions in the future or the Volcker rule which has the purpose of de-coupling standard lending activities from risky actions like proprietary trading.

Sovereign debt has no governor like the ones that can be created for the global capital markets. The IMF is concerned that as the amount of sovereign debt grows, it may begin to crowd debt issued by corporations and municipalities out of the market which will almost certainly lead to higher interest rates–essentially releveraging the economy because nations will not balance their budgets.

The IMF report is hardly encouraging. The risks, it supposes, to the global economy lie more in the future than they did in the past. The financial system’s inability to learn from mistakes continues.

Douglas A. McIntyre

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