The International Monetary Fund has long been the world’s global financial firefighter. But increasingly the IMF’s 186 member nations expects the lender to spot fires before they even ignite.
At the IMF’s spring meeting, currently taking place in Washington DC, the fund’s vast army of economists has been attempting to do just this. Having failed to anticipate the 2008 financial meltdown the IMF is eager not to miss any looming threat to the global economy. With that in mind, IMF research can often read like a catalogue of disasters waiting to happen.
Not surprisingly this year’s warnings revolved around rising government debt and the plight of the eurozone. As finance ministers and central bank governors started to descend on DC, there were signs that the euro crisis was flaring up again.
It was exactly the kind of threat the IMF had envisaged in its Global Financial Stability Report, a twice yearly summary of risks.
Safe assets are becoming something of an endangered species, the IMF warns. Those looking to government bonds for risk-free investments will face a more limited choice. As governments worldwide taken on ever heavier debt burdens, credit quality will deteriorate. In total around $9trn of safe assets will be taken out of the market over the coming four years – roughly 16% of the total, the IMF forecasts.
Not surprisingly much of this deterioration will come in Europe.
The Fund expects several eurozone members to keep missing their fiscal targets. Spain, which pledged to keep its deficit at 5.3% this year, is more likely to hit 6%, the IMF argues, and it’s 3% target for 2013 looks even less probable.
France, which hasn’t balanced the budget since 1976, is being equally unrealistic.
The IMF also underlined why the outlook for government finances worldwide looks bleak. Even a modest rise in borrowing costs, the Fund argues, would derail efforts to stop the inexorable rise of government debts in the United States, Britain and France.
The crisis in the eurozone has shown how quickly jittery traders can push up interest rates.
Worries over government debt will also cause banks to pull in their horns, especially in Europe. The IMF expects EU-based banks to shrink their balance sheets by around $2.6trn between September 2011 and the end up 2013, a reduction of about 7% in bank assets or close to 2% of total credit outstanding.
And that’s looking on the bright side. Without policies to support confidence, the credit contraction could top 4 %, causing the eurozone economies to shrink by around 1.4 %. This would also take a severe toll on Eastern Europe, which relies heavily on the eurozone to purchase its exports.
The IMF typically tries not to sound alarmist in its public pronouncements, for fear of adding to anxiety in financial market. Still the scenarios outlined in recent days suggests it may have plenty of fire-fighting to do over coming years.
Christopher Alkan, writer of the economia Letters From America column, is in Washington DC for the IMF Spring meeting