Global Financial Stability Report

Monday, Apr 20, 2009

In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about twothirds of which would be incurred by banks.

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Despite unprecedented official initiatives to stop the downward spiral in advanced economies-- including massive amounts of fiscal support and an array of liquidity facilities-- further determined policy action will be required to help restore confidence and to relieve the financial markets of the uncertainties that are undermining the prospects for an economic recovery. However, the transfer of financial risks from the private to the public sector poses challenges. There are continuing concerns about unintended distortions and whether the short-term stimulus costs, including open-ended bank support packages, will combine with longer-term pressures from aging populations to put strong upward pressure on government debt burdens in some advanced economies. Home bias is also setting in as officials are encouraging banks to lend locally and consumers to keep their spending domestically oriented.

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Even if policy actions are taken expeditiously and implemented as intended, the deleveraging process will be slow and painful, with the economic recovery likely to be protracted.

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The inflation potential of a swelling of reserve money has led inflation expectations to tick up in response to some announcements of unconventional measures by central banks.

International Monetary Fund, Global Financial Stability Report, April 2009, http://www.imf.org/external/pubs/ft/gfsr/2009/01/pdf/text.pdf.