The International Monetary Fund (IMF) said that if political leaders fail to quell the fiscal crisis, either by missing a deadline for setting up a single supervisory system or by not tightening fiscal policy sufficiently, it foresees European banks having to sell up to $4.5 trillion in assets through 2013.
Bloomberg reported late Tuesday that the IMF increased its estimate of how much banks may have to shrink their assets by 18% from what it anticipated last April. If the 58 European Union (EU) banks have to trim that much, the IMF said, credit would be harmed, and 2013 growth would fall by 4% in the peripheral countries of Cyprus, Greece, Ireland, Italy, Portugal and Spain.
“Intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops,” the IMF wrote in its Global Financial Stability Report. “Restoring confidence among private investors is paramount for the stabilization of the euro area.”
The day before, it had cut global growth predictions, as reported by AdvisorOne. Jose Vinals, director of the IMF’s monetary and capital markets department, said in prepared remarks for a Tokyo press conference that the European Stability Mechanism (ESM) and the ECB bond buying program “must be regarded by markets as real, not ‘virtual’ and should be coupled with credible conditionality.”