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Europe crisis,capital inflows into emerging markets pose risks: IMF

Though the global financial stability has improved,the overall recovery remains 'uneven',IMF said.

Written by Agencies | Washington |
April 13, 2011 9:21:01 pm

The International Monetary Fund today cautioned that continuing debt woes in the euro zone as well as greater capital inflows into emerging markets pose significant risks to the global financial stability.

Even though the global financial stability has improved in the past six months,the overall recovery remains “uneven”,IMF said.

“In the next few months,the most pressing challenge is the funding of banks and sovereigns,particularly in some vulnerable euro area countries.

“… remaining structural weaknesses and vulnerabilities in the euro area still pose significant downside risks if not addressed comprehensively,” the latest Global Financial Stability Report said.

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The report stressed that confidence in the banking systems of many advanced economies has not been restored and “continues to interact adversely with sovereign risks in the euro area”.

According to the IMF,capital inflows to emerging markets could strain their absorptive capacity,raising concerns about the gradual build up of macrofinancial risks.

In recent times,India,China and many other emerging economies have seen huge foreign fund inflows amid loose monetary policies in most of the advanced countries.

“The response of emerging market firms to equity and debt inflows has been strong.

“Equity issuance rose to the highest levels ever in Brazil and China,and although in India and Korea such issuance remained below pre-global crisis highs,it surpassed pre-Asian crisis levels,” the report said.

IMF emphasised that even nearly four years since the onset of the financial crisis,balance sheet fragilities continue to pose key downside risks to global financial stability and the economic recovery.

The multilateral lender has pointed out that geopolitical risks could also threaten the economic and financial outlook,especially with soaring oil prices in the wake of unrest in the Middle East and North Africa.

“… heavy debt burdens and high unemployment continue to weigh on economic growth in advanced economies,while emerging market economies continue to grow strongly,” the report said.

Moreover,the “two-speed recovery” has thrown up different policy challenges for developed and developing countries.

IMF has projected the global economy to clock a growth of 4.4 per cent in 2011 and 4.5 per cent in 2012.

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