The IMF (International Monetary Fund) says that trouble with the sovereign debt markets and a collapsed real estate market in America have undermined the global financial recovery. Based on its statements, the problems are not likely to go away and could get worse.

The agency, in its Global Financial Stability Report for October, predicts that Europe’s problems could be based on the simple problem that national debt levels are still too high and slow economic growth will make it hard to bring down deficits.  This is particularly true in the smaller nations that have limited access to capital markets. The trouble in Ireland is the best current example. Moody’s has threatened to downgrade Ireland’s sovereign debt because its projected deficit will be 32% of GDP, and the government has aggressively resisted calls for higher taxes.

The IMF makes two observations about the US. The first is that the extraordinary risk taken on by financial firms in the years before the credit crisis has been transferred to the nation’s balance sheet. That problem may not be extraordinary because it seems that taxpayers may actually recoup much of the money put into firms like Citigroup (NYSE: C) and American International Group (NYSE: AIG).

The second and more vexing problem is the collapse of the commercial and residential real estate markets. The trouble has wiped out tremendous sums of home equity, and over 11 million mortgages are underwater–about 23% of all outstanding home loans. This has undermined consumer access to capital. High unemployment is likely to keep demand for housing down.

The failure of real estate loans has also damaged bank balance sheets, particularly at regional and community banks. This trend will put strains on the FDIC as banks fail.

The IMF report has an uncannily accurate description of the drags on global economic growth. It does not, however, have any realistic conclusions.

Douglas A. McIntyre

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