The IMF used its half-yearly global financial stability report to call for urgent action on the problems of banks in the eurozone, a third of which it said faced “significant challenges” to be sustainably profitable.
“In the euro area, market pressures also highlighted long-standing legacy issues, indicating that a more complete solution to European banks’ problems cannot be further postponed,” the Fund said.
It said there needed to be a comprehensive strategy to deal with €900bn (£715bn) of non-performing loans (NPLs) on the books of eurozone banks, adding that banks also needed to be closed in order to deal with excess capacity.
“The hardest hit banking systems within the euro area in February have been those of Greece, Italy, and to a lesser extent, Portugal, along with some large German banks, reflecting some or all of the following factors: structural problems of excess bank capacity, high levels of NPLs, and poorly adapted business models.”
Noting that threats to global financial stability had increased since its last health check in October, the Fund said:
“The main message of this report is that additional measures are needed to deliver a more balanced and potent policy mix for improving the growth and inflation outlook and securing financial stability. In the absence of such measures, market turmoil may recur.”
It added that there was a risk that investors would demand high interest rates and those tougher financial conditions would create a “pernicious feedback loop” of fragile confidence, lower growth and inflation, and rising debt.
“Disruptions to global asset markets could increase the risks of tipping into a more serious and prolonged slowdown marked by financial and economic stagnation.”