The International Monetary Fund says credit crunch may impact supply chain

Progress to restore global financial stability has suffered a setback in advanced economies, the International Monetary Fund said in its latest Global Financial Stability Report, with markets still sensitive to negative surprises.

While the outlook in the Global Financial Stability Report is for continued recovery and a gradual improvement in financial stability, considerable risks remain. Rising public debt burdens, funding challenges for banks, and increased uncertainty about the next phase of the recovery have prevented a return of confidence.

José Viñals, Financial Counselor and Director of the IMF’s Monetary and Capital Markets Department, said the financial system remains the “Achilles’ heel of the recovery” because of unfinished repairs to bank balance sheets and the need for further regulatory reforms.

“As a result, financial markets remain sensitive to negative surprises, and can quickly shift back to crisis mode,” said Viñals.

Carlos Gutierrez, chairman of Global Political Strategies. Speaking at the Council of Supply Chain Management Professional’s (CSCMP) annual meeting in San Diego last week, also noted that public debt is still high and rising in many advanced economies. Both he and Viñals maintain that more needs to be done to ensure sustainability.

According to the IMF, coordinated government support programs and the announcement of ambitious fiscal reforms have helped contain the market turmoil that broke out in April and May this year. However, fiscal risks remain elevated, particularly in advanced economies where public sector balance sheets have significant weaknesses.

Meanwhile, risks in emerging economies have declined in the past six months, and countries have benefited from inflows of capital as investors seek out higher returns and better growth prospects, notably in Asia and Latin America. As advanced economies continue to struggle with high debt levels, emerging economies are expected to near pre-crisis low debt levels in the next few years.

The IMF said there is the potential for substantial asset reallocation to emerging markets from advanced economies, which could mean a surge in capital flows.

While countries have a number of different macroprudential tools to deal with the risks associated with large capital inflows, the IMF said policies should focus on measures that improve the capacity of local markets to absorb the capital.

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