Attached are the four conclusions of the IMF’s Financial Stability Update just released, in so far as they concern the Eurozone, with my comments:
‘In the European Union, the steps listed below are needed to reduce uncertainty and help restore confidence in markets.
- Further rigorous and credible bank stress testing is required along with time-bound follow-up plans for recapitalization and restructuring of viable, undercapitalized institutions and closure of nonviable ones.’
Comment: The IMF is suggesting new stress tests and ‘follow-up’ recapitalisation and re-structuring of banks. In that order, not in the reverse order.
- ‘The effective size of the European Financial Stability Facility should be increased and it should have a more flexible mandate. For countries where the banking system represents a large proportion of the economy, it is now even more essential to ensure access to sufficient funds, going beyond national backstops whenever necessary.’
Comment: Means the EFSF is inadequate in size and function, particularly for countries with large banking systems, such as Ireland.
- ‘Euro area-wide resolution mechanisms need to be deployed and strengthened as needed. The introduction of a pan-European bank resolution framework with an EU-wide fiscal backstop would help decouple sovereign and banking risks.’
Comment: Means the IMF wants to share bank losses with bank creditors and re-capitalise banks with EU-wide, and not just national, fiscal support.
- ‘The European Central Bank will need to continue to supply liquidity to banks that need it and keep its Securities Markets Program active, while also recognizing that this is a temporary set of measures and will not solve the underlying problems.’
Comment: Means that ECB has been overly restrictive on both counts.
Does anyone still believe that the IMF was happy with the design of the Irish bail-out?