April 11 2013

Debt sustainability analysis which leaked last night shows that Cyprus’s contribution to its own financing package has risen from €7bn to €13bn. Unemployment rate in Greece reaches 27.2%. US jobless claims fall by 42,000 to 346,000…


Powered by Guardian.co.ukThis article titled “Eurozone crisis: Alarm as Cyprus rescue bill swells to €23bn – as it happened” was written by Graeme Wearden, for theguardian.com on Thursday 11th April 2013 17.21 UTC

6.47pm BST

Closing summary

Tomorrow, finance ministers will hold their next meeting in Dublin. On the agenda — Cyprus's fiscal reform programme, the situation in Portugal, and whether to agree to extend the existing Portuguese and Irish rescue loans.

But that's all for today.

Here's a very brief closing summary.

The cost of Cyprus's financial rescue package has swelled to €23bn, documents disclosed last night have shown.

The extra cost, around €6bn, will fall on Cyprus itself, whose contribution has risen to €13bn (details at 8.46am)

The report predicts that the Cypriot economy will contract by over 12% in 2013 and 2014. Many bloggers (9.16am onwards) and City analysts (see 1.59pm) believe the forecasts are too optimistic.

Olli Rehn admitted tonight that the Commission cannot be sure how sharply Cyprus will contract (see 6.21pm)

Cyprus's government has denied that it will be forced to sell its gold reserves, although the report does state that Nicosia will raise €400m through a gold sale (see 1.23pm).

There are fears tonight that Portugal may need extra help from its lenders. Leaked documents, and analysis from Open Europe, both point to problems with funding that could prevent its return to the markets (see 4.03pm).

Mario Draghi has written to Cyprus's president, warning him not to fire central bank governor Panicos Demetriades (see 3.35pm onwards).

Eurogroup president Jeroem Dijsselbloem has predicted that finance ministers will agree to extend Portugal and Ireland's bailout loans tomorrow (see 2.43pm)

And in Athens, the Greek government has warned Germany that the long-standing issue of war reparations will not be forgotten…. (see 12.03pm)

We'll be back tomorrow – until then, thanks and goodnight!

6.21pm BST

Rehn: Hard to say how much Cyprus will contract

Just in – Olli Rehn, European Commissioner for monetary union, has given an interview to the Wall Street Journal / Dow Jones in which he admits that the full scale of Cyprus's recession is hard to calculate.

Their ace Matina Stevis has reported the key points on Twitter:

We've reported several times today that City experts don't believe Cyprus's economic targets are realistic (for example).

Rehn is also pushing for decisions on European banking union to be taken soon.

6.00pm BST

On a lighter note, the Central Bank of Ireland has accidentally minted 10,000 €10 coins honouring Irish writer James Joyce with an mistake in them.

The coins unfortunately include an extra word in a key quote from Ulysses:

Joyce wrote: "Ineluctable modality of the visible: at least that if no more, thought through my eyes. Signatures of all things I am here to read."

But alas the word 'that' has been added to the second line:

A view of a limited addition James Joyce collector coin issued by the Central Bank of Ireland. PRESS ASSOCIATION Photo. Issue date: Thursday April 11, 2013.
Photograph: Jason Clarke/PA

Our Dublin correspondent, Henry McDonald, has written the full story here. Bit of an embarrassment for the Bank of Ireland (although probably not enough to get the governor sacked — perhaps Mario Draghi will write another letter just in case…..).

And speaking of quotes… Danny Gabay, of City consultancy Fathom, has mischievously reminded us of a quote from Draghi's predecessor, Jean-Claude Trichet, when Cyprus entered the single currency in 2008:

For a small, open economy like Cyprus, euro adoption provides protection from international financial turmoil which often has a disproportionate impact on smaller economies.

Up to a point….

Updated at 6.21pm BST

4.36pm BST

Draghi’s letter received

Cyprus' government spokesman has confirmed that the ECB president's letter had landed in Nicosia, reports Helena Smith 

"We can confirm receipt of the letter," the spokesman Christos Stylianides said. He also had a retort for Draghi. "There is no issue for the government because its position has, and is, well-known regarding the autonomy of institutions," he added. "One thing is political handling [of an issue] and quite another the technocratic handling of an issue." 

4.03pm BST

Will Portugal need a second bailout?

Two interesting articles about Portugal to flag up – both warning that it is likely to need more financial help soon.

1) On at the Financial Times, Peter Spiegel is clasping another leaked document – showing that a second bailout is likely.

Peter writes:

Although the document doesn’t address it directly, it makes clear that Portugal will have a very hard time avoiding a second bailout, since its financing needs in 2014 and 2015 – its first years after bailout funding runs out in July 2014 – will be substantially higher than they were during the pre-crisis period.

2) Open Europe, the think tank, also believes Portugal needs more help.

It's new research paper (pfd) outlines how the Portuguese economy is deteriorating sharply. This could mean that Portugal taps the ECB's new bond-buying scheme, the Outright Monetary Transactions plan.

Here's Open Europe's analysis of Portugal's problems:

  • Domestic demand, government spending and investment are contracting sharply, leaving the country heavily reliant on uncertain export growth to drive the economy.
  • By cutting wages and costs at home (internal devaluation), Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany. However, this trend actually started to reverse sharply in 2012, meaning that the divergence between countries such as Portugal and Germany has begun growing again – exactly the sort of imbalance the eurozone is seeking to close.
  • In its austerity efforts, Portugal is now coming up against serious political and constitutional limits. For the second time, the country’s constitutional court has ruled against public sector wage cuts – a key plank in the country’s EU-mandated austerity plan – while the previous political consensus in the parliament for austerity has evaporated.
  • In combination, it will be increasingly difficult for Portugal to sell austerity at home and consequently to negotiate its bailout terms with creditor countries abroad.
  • Portugal may well need some further financial assistance before long. It is unlikely to take the form of a full second bailout, but could involve use of the ECB’s OMT bond-buying programme, assuming Portugal can return to the markets fully beforehand (even briefly).

3.49pm BST

Mario Draghi’s letter

Ta Nea has uploaded a copy of Mario Draghi's letter to the Cyprus president – click here to see it in Greek – in which the ECB chief warns against dismissing central bank head Panicos Demetriades.

As reported in our previous post, it reminds Nicos Anastasiades that a central bank governor cannot be dismissed unless he can no longer fulfill his duties or if he is guilty of serious misconduct.

Updated at 3.52pm BST

3.35pm BST

Draghi warns against firing Cyprus’s central bank governor – report

Mario Draghi, president of the European Central Bank (ECB), speaks during a news conference at the bank's headquarters on April 4, 2013 in Frankfurt, Germany.
Mario Draghi, president of the European Central Bank (ECB), has reportedly written to Cyprus’s president warning against dismissing his central bank governor. Photograph: Imago/Barcroft Media

As if Cyprus’ problems weren’t big enough, the island’s president also appears to face mounting criticism from European Central Bank Mario Draghi over his treatment of the governor of the central bank of Cyprus, reports Helena Smith, our correspondent in Athens.

She writes:

The ECB president Mario Draghi has reportedly taken the unusual step of reading the riot act to Cypriot president Nikos Anastasiades following mounting pressure on the island’s central bank governor to resign.

In a withering letter, Draghi warned the embattled leader that firing Panicos Demetriades over his handling of Cyprus’ worsening crisis would go against European Union law with which, he said, local legislation had to be “compatible.”

“As you know any decision to remove a governor from his duties is subject to judicial investigation by the Europe Union court,” he wrote adding that a central bank governor could only be sacked if he was found to be incapable of conducting his duty or judged guilty of serious misconduct.

The measures, he reminded Anastasiades, had been put in place to guarantee the independence of central bank governorship.

Draghi's letter was first reported by Ta Nea, Grece's leading daily, this afternoon – here's the story.

Helena adds:

Demetriades, who was appointed by former president Demetris Christofias, a veteran communist, has faced furious criticism over his role in the collapse of the island’s second largest lender, Laiki, and enforced losses depositors with over 100,00 euro at Laiki and the Bank of Cyprus will be forced to shoulder. Anastasiades says the central bank should have restructured Laiki after it was nationalized last year. The governor, who insists that the stringent terms of Cyprus’ bailout was a “political decision,” now faces criminal charges when a parliamentary investigation commences next week.

Draghi wrote the letter after the Cypriot leader sacked Demetriades’ deputy, Spyros Stavrinakis, earlier this week, Ta Nea said.

I just called the ECB, but alas they won't comment on the letter, or confirm that it was sent.

The ECB statute, though, is pretty clear that central bank governors can't be fired on whim. Here's the key section:


14.2. The statutes of the national central banks shall, in particular, provide that the term of office of a Governor of a national central bank shall be no less than five years.

A Governor may be relieved from office only if he no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct. A decision to this effect may be referred to the Court of Justice by the Governor concerned or the Governing Council on grounds of infringement of these Treaties or of any rule of law relating to their application.

Such proceedings shall be instituted within two months of the publication of the decision or of its notification to the plaintiff or, in the absence thereof, of the day on which it came to the knowledge of the latter, as the case may be.


Updated at 3.36pm BST

2.43pm BST

Dijsselbloem: Ireland and Portugal should get loan help

Jeroen Dijsselbloem, the Dutch finance minister who leads the eurogroup of finance ministers (not without incident, either) has predicted that Ireland and Portugal will be granted extensions to their bailout loans on Friday.

Dijsselbloem is in Cork ahead of a two-day meeting of finance ministers that starts tomorrow. He told a press conference this afternoon that the eurogroup will probably decided to grant Ireland and Portugal seven more years to repay their loans from the European Union.

Dijsselbloem said:

The intention is very positive.

I hope that we will be able to finalise that tomorrow

(quotes via Reuters)

Extending the loans will lower the repayment burden, making it easier for both countries to return to the financial markets. But there are particular concerns over Portugal today, and whether it will soon need more help…. (more to follow)

1.59pm BST

Two City analysts have added to fears that Cyprus won't be able to hit the fiscal forecasts drawn up in its bailout plan.

Christoph Weil of Commerzbank reckoned that the country could get close to the growth figures"if everything goes according to plan", but warns that everything probably won't.

In particular, Weil suspects that Cyprus will not return to growth in 2015, when it is expected to grow by 1.1%.

AP's Juergen Baetz reports:

"If there are any problems and there are significant downside risks then it could be much worse, and a combined contraction of 20% is within the range of the possible," Weil said….

"The country must go through a painful and wide-ranging restructuring of its economy, with half of its banking sector evaporating, I think it will take at least three years for the economy to bottom out."

Jonathan Loynes of Capital Economics also believes the economic projections contain "a considerable degree of optimism":

This could force Cyprus to undertake further fiscal tightening to meet its borrowing targets and casting doubt over the sustainability of the bail-out.

Juergen's full story is online here: Cyprus bailout swells to billion

1.23pm BST

Cyprus: gold sale is not certain

Officials in Cyprus are playing down the prospect that the country will be forced to sell a chunk of its gold reserves

Government spokesman Christos Stylianides confirmed in the last few minutes that a gold sale is an option for financing the bailout. The responsibility, though, remains with Cyprus's central bank.

Stylianides also confirmed that the Cyprus financing package has risen to €23bn.

The Cyprus central bank had already denied this morning that the country's gold reserves would be sold.

Here's what the document outlining Cyprus's financing needs states:

It is envisaged to use the allocation of future central bank profits of approximately [EUR 0.4bn], subject to the principle of central bank independence and provided such profit allocation is in line with CBC rules and does not undermine the CBC duties under the Treaties and the Statute. 

Details of Cyprus gold sale
Photograph: EC

Cyprus is estimated to have around 13.9 tonnes of gold, and would have to sell over 10 tonnes, at today's prices, to raise €400m.

Adrian Ash, head of research at BullionVault, reckons it would the biggest bullion sale by a Eurozone central bank since France sold 17.4 tonnes in the first half of 2009, and would set a precedent.

Ash added:

What's interesting for Cyprus now is the EC's wording in the proposal. Advising Cyprus to sell off "excess" gold could be seen to point to the very heavy share of gold in the central bank's currency reserves – a massive 62%.

Yes, that's pretty much in line with the Eurozone as a whole (when you include the ECB's holdings), but it also suggests an attempt to get around the legal block on financing state deficits by selling central-bank assets via some or other "target" level for gold as a percentage of reserves.

12.40pm BST

In Athens, the government is holding fresh talks with top officials from the Troika today.

Here's a photo of IMF mission chief Poul Thomsen arriving for another meeting with Greek finance minister Yannis Stournaras:

International Monetary Fund (IMF) mission chief Poul Thomsen, center,  arrives for a meeting between Greek Finance Minister Yannis Stournaras and the debt inspectors from the European Central Bank, European Commission and International Monetary Fund, known as the troika, in Athens, Thursday, April 11, 2013.
Photograph: Petros Giannakouris/AP

Negotiations between the two sides have been grinding on for days. They are still trying to reach an agreement on overhauling the Greek civil services. The Troika is reportedly pushing for 7,000 officials to be laid off this year, rising to 20,000 by the end of 2014. Athens is refusing to accept this – thus the ongoing talks….

12.03pm BST

Greece chides Germany over war reparations issue

The question of whether Germany owes Greece billions of euros of unpaid reparations following the second world war has flared up today.

Greek foreign minister Dimitris Avramopoulos has hit back after Germany's finance minister, Wolfgang Schäuble, suggested that Greece should drop the issue and focus on reforming its economy.

Avramopoulos insisted that the matter was still important to Athens, and would be resolved in the courts (the full statement is below).

Some background:

This issue of German war reparations has been a running sore in Greece since the financial crisis began.

As well as the thousands of Greek lives lost and destruction of infrastructure, the Bank of Greece also made loans to the occupying forces during the 1941-1944 Axis occupation.

Some historians have claimed that compensation was never paid. And their voices have become louder since the first Greek bailout, and the demands placed on the country by the eurozone.

And now….

A new report, commissioned by the Greek government, had reportedly found compelling evidence that Germany is liable for large sums (one earlier estimate puts the bill at €162bn). It was put together by a group of researchers who ploughed through masses of official documents, dating back decades. (here's a report in To Vima).

Asked about the issue this week, Schäuble flatly rejected the suggestion that Germany could, let alone would, pay such compensation today.

Schäuble  apparently told a German newspaper (details here) that:

Greece has achieved a lot, but still had a long way to go.

[Greeks] should not lose their direction. Regarding the claims for reparations, I see no hope because this matter was cleared up a while ago.

This prompted today's rare official comment on the issue, with Avramopoulos declaring:

The reforms being carried out in Greece bear no relation – and can bear no relation – to the issue of German reparations.

What’s more, German reparations are an issue that the Greek state has been raising for many years now.

Whether this case has been resolved or not is determined by international justice, given that, by its nature, this issue concerns international law and the international justice organs.

Greece is not ‘losing its focus’ on the reform policy, despite the great sacrifices the Greek people are shouldering.

It seems certain that the issue will get more attention once the official report is published later this year.

10.50am BST

Greek jobless rate hits another record high

In Greece, the unemployment rate has risen to a new record high — as its long recession continues to scar the country's workforce.

The jobless rate is now 27.2%, data for January from the Hellenic Statistical Authority showed. That's double the eurozone average of 12% recorded in February (Greece's data lags a month behind).

Greece's jobless rate is the worst in the eurozone, behind Spain (26.3%) and Portugal (17.5%).

The full data is online here.

This graph shows how the jobless rate has risen steadily, although there was a welcome blip last December (when the rate dropped to 25.7%)

Greece's jobless rate, to Jabuary 2013

The data also shows that 31.4% of women are out of work in Greece, compared to 23.9% of men.

And the youth jobless crisis is as awful as ever – with 59.3% of 15-24 year olds out of work.

10.42am BST

Where to read the reports

Just a reminder.

The Cyprus debt sustainability analysis, which includes the economic forecasts and various measures being taken under the bailout, is online here: Assessment of the public debt sustainability of Cyprus

And the financial details of the package, explaining how it has risen to €23bn, is online here: Assessment of the actual or potential financing needs of Cyprus.

(those documents are hosted by the FT, after first reaching Reuters and Dow Jones last night)

Updated at 11.05am BST

10.18am BST

How to make a catastrophe out of a crisis

It's easy to be critical of the European authorities over the Cyprus bailout plan (see this morning's earlier posts). But the finger of responsibility must also be pointed at Nicosia, and the fateful decision to impose a levy on all savers.

Although abandoned, this move created genuine alarm among Cypriots when it was announced as part of Bailout Plan A on 16 March.

We then had a week of political deadlock after MPs sensational rejected the plan, cunning plans including for a National Solidarity Fund which went nowhere, before president Nicos Anastasiades accepted the current programme after a dramatic meeting in Brussels (liveblogged here).

A better plan originally would surely have kept the bill below its current €23bn (although perhaps the original €17bn target was always too optimistic).

Blame all round. To quote Pawelmorski again:

The Cyprus negotiations started with a high-risk gamble – that depositors would bear part of the pain of restructuring; unfortunately, the Cypriot parliament then tried to bluff the Troika whilst declaring loudly that they didn’t have any cards at all, and a catastrophe was duly created.

10.04am BST

Pawel Morski on ‘lies’ and lessons in the Cyprus plan

Another great blog post on Cyprus, from fund manager @pawelmorski:

Cyprus: Of Course It’s A Template

It's a comprehensive take-down of the calculations within the Debt Sustainability Analysis.

These economic forecasts are dismissed as "worse than literally laughable":

Cyprus economic forecasts
Photograph: EC

Can exports really fall by just 5%, with a ravaged banking industry and the introduction of capital controls? Won't the losses suffered by wealthy depositors have a rather larger impact on spending (measures by consumption)?

The wealth effect wiping deposit worth 60% of GDP will apparently barely register on consumption – the Troika must think the deposits are all Russian. Compare with Iceland (50% drop in investment) or Latvia (40%), the former boosted by devaluation the latter by an intact financial system….

These projections cross the line from wild optimism into contemptuously half-hearted fable. This table is a bare-faced lie.

Another experienced voice warning that Cyprus's adjustment programme may go off the rails…..

Morski also makes an important point about the lessons we can learn from Cyprus as a model for the future.

Eurozone officials clearly moving to a system where taxpayers pay the price of rescuing banks to one where investors and large depositors do.

For a non-Template, the Cyprus solution drops some cracking clues as to EU priorities. At present, the capital structure is equity, subordinated debt, then senior debt and depositors together.

The new hierarchy will be: equity, sub debt, senior debt, uninsured depositors, and then at the top of the mountain as the floodwaters rise, voters insured depositors (remember that while a very big chunk of deposits are uninsured, almost all depositors are) the ECB and the Eurosystem…

There are good arguments for shifting the burden of bank rescues onto those who directly and deliberately benefit in the good times. There is also a powerful case that Europe's banks aren't strong enough, or investors confident enough, to make the shift now….

More here: Cyprus: Of Course It’s A Template

(PS: If you're on Twitter you really should be following @pawelmorski – especially if you enjoy a good scrap)

Updated at 10.11am BST

9.36am BST

Yiannis Mouzakis: Cyprus likely to miss its fiscal targets

From Cyprus, blogger Yiannis Mouzakis also fears that the targets outlined in the debt sustainability analysis are too optimistic.

This is the key chart, predicting how Cyprus's debt as a percentage of GDP (the crucial measure of debt sustainability in the Troika's book), will rise and then fall through its bailout programme.

Cyprus programe: debt/GDP forecast
Projections for Cyprus’s debt/GDP until 2020. Photograph: /EC

The grey area shows the areas of uncertainty – depending if the bailout programme goes better than expected, or worse.

Greece has been a textbook example of over-optimistic forecasts, which were missed, leading to extra austerity, leading to lower growth, leading to missed targets.

Yiannis fears a repeat, given the Troika's track record:

With a policy mix that has consistently surprised negatively on growth in every country that is either in a program or simply is forced to follow the Commission’s diktat, fiscal targets that are repeatedly missed even from the most compliant of countries like Portugal, and overall DSAs from the troika that are the definition of revision, the adverse scenario in the DSA of Cyprus is the one that is most likely to materialise.

More here: Another sorry debt sustainability analysis

9.16am BST

Joseph Cotterill: If you didn’t laugh you’d cry

Over on FT Alphaville Joseph Cotterill has crunched through the debt sustainability analysis, and is pretty alarmed:

The amount Cyprus had to find from depositors went up by €5bn in the nine or so days between the initial stupid idea and the deal they all eventually reached. Cyprus is a (roughly) €18bn economy. If you didn’t laugh you’d cry.

Joseph has concluded that the sums are seriously unconvincing, and driven by the need to keep the total bill for international lenders at €10bn:

Does the whole DSA read like an attempt to squeeze everything below this limit rather than set the numbers to what would be sustainable, even if they come out higher? Why yes it does.

He's also drilled into one particular detail: that Cyprus is expected to roll over up to €1bn of domestic law long-term debt, through a "voluntary sovereign bond exchange" covering bonds maturing in 2013-15.

It's a messy situation – but he reckons it could see eurozone heading for its second sovereign debt restructuring (after Greece, of course).

More here: The eurozone’s second sovereign restructuring?

Updated at 9.16am BST

8.46am BST

Cyprus debt sustainability report: Cyprus to supply €13bn

Good morning, and welcome to our rolling coverage of the eurozone crisis and other developments in the world economy.

The scale of the crisis in Cyprus has been exposed by the official report into the country's debt sustainability assessment, which leaked on Wednesday afternoon [covered in yesterday's blog].

The total rescue package has jumped to €23bn, from €17bn, and it won't be a surprise that it's Cyprus, not its international lenders, filling the gap.

Thanks to the documents [posted online last night by the FT's invaluable Peter Spiegel], you can see that Cyprus is now expected to contribute €13bn to the financing of the adjustment programme. When the deal was first agreed, it was €7bn.

Here's how it breaks down:

1) €10.6bn from restructuring the banking sector (the resolution of Laiki Bank, and "bailing-in" junior debt and uninsured deposits in the Bank of Cyprus)

2) €600m from raising corporation tax, taxes on capital income, and increasing the bank levy on deposits raised by banks and credit institutions

3) €400m through selling some of Cyprus's gold reserves

4) €1.4bn through privatisations.

Cyprus is also expected to haggle a lower interest rate on its loan from the Russian Federation. And roll over some of its own bonds (of which more shortly….)

The unexpected jump in the refinancing package underlines quite how botched the original bailout was, and the scale of the damage caused to Cyprus during those mad March days.

Cyprus is expected to suffer a dire double-digit slump — contracting by 8.7% this year and another 3.9% in 2014. This chart explains:

Cyprus GDP - from DSA April 2013
Photograph: EC

But it could be much worse — as the debt sustainability analysis itself warns:

There is a non-negligible risk of a cycle of household and corporate defaults propagating through the economy, leading to further banking sector losses, worsening of labour market conditions, stronger than expected fall in house price and a prolonged loss of business and consumer confidence.

All factors we've seen played out in other eurozone bailouts since the crisis began. 

And if these forecasts are too optimistic, it's Cyprus who will be dipping back into its pocket. The DPA again:

In the event of underperformance of revenues or higher social spending needs, the Cypriot government has committed to stand ready to take additional measures to preserve the programme objectives, including by reducing discretionary spending, taking into account adverse macroeconomic effects.

A strategy that worked so well in Greece…

The DPA is also pretty blunt about the changes wrought on the Cypriot financial sector. The Cyprus-domestic banking sector used to represent 550% of the country's GDP. Not any more….

As a result of these actions the Cypriot banking sector has been downsized immediately and significantly to [350]% of GDP.

And the conclusion of the Debt Sustainability Analysis could send shivers through Nicosia:

A number of downside and upside risks to the debt projections may impact on the actual debt trajectory. Although difficult to quantify, downside risks appear dominant.

There's some good analysis of the reports already this morning (which I'll link to next). But take a look yourself:

Assessment of the public debt sustainability of Cyprus

Assessment of the actual or potential financing needs of Cyprus

(with another nod to the FT).

I'll also be tracking other events in the eurozone and beyond through the day….

Updated at 9.08am BST

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Ultra-low interest rates and purchases of government bonds may be shifting instability from banks to other parts of economy, according to the IMF. The Washington-based organization said risks would increase the longer the stimulus was kept in place…


Powered by Guardian.co.ukThis article titled “IMF warns over rock-bottom interest rates” was written by Larry Elliott, economics editor, for The Guardian on Thursday 11th April 2013 17.40 UTC

The International Monetary Fund has warned central banks to be alert to the potentially damaging side-effects of ultra-low interest rates and "unconventional" measures to boost growth after the deep slump of 2008-09.

While backing the use of exceptional action to prevent the collapse of the financial system, the IMF said the risks would grow the longer the stimulus was kept in place.

The Washington-based body used a chapter in its latest global financial stability report to note that rock-bottom interest rates and purchases of government bonds might be shifting instability from banks to other parts of the financial system or other parts of the global economy. It added that care would have to be taken when central banks decided the time was right to remove the stimulus.

"Interest rate and unconventional policies conducted by the central banks of four major regions – the euro area, Japan, the UK and the US – appear indeed to have lessened vulnerabilities in the domestic banking sector and contributed to financial stability in the short term," the IMF said.

"Policymakers should be alert to the possibility, however, that financial stability risks may be shifting to other parts of the financial system, such as shadow banks, pension funds and insurance companies. The central bank policy actions also carry the risk that their effects will spill over to other economies."

Finance ministers and central bank governors will discuss the results of what the report called their "unprecedented intervention" when they gather in Washington next week for the IMF spring meeting. The discussions will be given added spice by Japan's recent decision to use ultra-loose monetary policy to lift the economy out of deflation.

US federal reserve building
The US Federal Reserve is considering slowing quantitative-easing measures. Photograph: Karen Bleier/AFP/Getty Images

After the collapse of Lehman Brothers in September 2008, central banks cut interest rates and also created electronic money in an attempt to compensate for the drying up of credit from hamstrung commercial banks. Although the measures were intended to be temporary, borrowing costs have not been raised and quantitative-easing (QE) programmes have not been reversed.

Minutes of the latest meeting of the US Federal Reserve's policymaking committee revealed that a debate was under way over whether the pace of QE should be slowed, and this approach was backed by the IMF in its report.

In the UK, the Fund noted that the impact of the Bank of England cutting its key interest rate to 0.5% – the lowest in its 319-year history – and £375bn of quantitative easing could be encouraging lenders to "evergreen loans rather than recognise them as non-performing". There was a possibility, the IMF said, that non-viable firms were being kept alive, and that this explained the low level of corporate insolvencies in Britain.

"Despite their positive short-term effects for banks, these central bank policies are associated with risks that are likely to increase the longer the policies are maintained. The current environment shows signs of delaying balance sheet repair in banks and could raise credit risk over the medium term. Markets may be alert to these medium-term risks, as central bank policy announcements have been associated with declines in some bank stocks and increases in yield spreads between bank bonds and government bonds," the report said.

"Central banks also face challenges in eventually exiting markets in which they have intervened heavily, including the interbank market; policy missteps during an exit could affect participants' expectations and market functioning, possibly leading to sharp price changes."

The IMF said monetary policy – measures affecting the money supply, interest rates and exchange rates – should remain stimulative until recovery was well established but added that policymakers needed to exercise "vigilant supervision to assess the existence of potential and emerging financial stability threats".

It suggested tougher capital and liquidity standards, coupled with the need to make provisions against future losses, adding: "The crisis has shown that corrective policies enacted after the risks materialise may be too late to contain damage to financial stability."

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