HIGHLIGHTS-IMF Global Financial Stability Report

TOKYO Tue Oct 9, 2012 9:22pm EDT

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TOKYO Oct 10 (Reuters) - The following are highlights of the International Monetary Fund briefing on its Global Financial Stability Report on Wednesday.

JOSE VINALS, DIRECTOR OF IMF'S MONETARY AND CAPITAL MARKETS DEPARTMENT:

OVERALL ASSESSMENT:

"Policy actions taken in Europe, in the United States here in Japan and also in emerging markets have improved investor sentiment and helped markets rebound in recent months. Yet our assessment that confidence is still very fragile and that risks have increased compared with the last report in April my main message is that further policy efforts are needed to gain lasting stability."

"The point I would like to stress is that we should not let the current market conditions, which have improved, lead to a false sense of security."

EURO AREA:

"The actions taken by the European Central Bank in recent weeks have helped remove investors' worst fears but these policies will need to be built upon both at the national and euro level area level.

"There are fourth things that are needed. First, safer banks. Progress has been made recently including the European banking authorities' capital enhancement exercise but weak banks still need to be restructured and when nonviable they need to be resolved. Second, safer sovereign thorough well timed fiscal consolidation and safer economies through structural reforms. Third, strong firewalls. The European stabilisation mechanism and the European Central bank OMT bond purchasing programme must be regarded by markets as real and not virtual and should be coupled with credible conditionality. And finally, there is a need for a stronger union. Establishment of the single supervisory mechanism is an important step that needs to be implemented without delay and it's also essential to provide a clear road map towards the completion of a banking union."

US AND JAPAN:

"A key lesson for the United States and Japan from the European debt crisis is that delaying policy adjustments until market strains become evident leads to financial turmoil and to harsher economic outcomes. Fiscal imbalances are amenable to medium term adjustment, but a blueprint for policy actions must be developed right away.

One point that I would like to stress is that we should not let current market conditions, which I said have improved, give rise to a false sense of security.

Indeed, safe haven flows to the United States and Japan and record low official interest rates through easy monetary policies have led to a suppression of risk premia in government and corporate bond markets.

Furthermore in the United states a potential political impasse could result in a repeat of debt ceiling strains and/or a push over a "fiscal cliff" which would entail significant risks to the US and the global economy. So it is essential that both risks are avoided and an end is put to those policy uncertainties.

In Japan, its high sovereign debt and the rising concentration of government holdings in the banking system pose important stability risks. For example, we project that in Japan bank holdings of government bonds could rise to about one third of total bank assets in five year's time, tying banks ever closer to the sovereign and potentially weakening financial stability should interest rates rise. So in the case of Japan macro prudential vigilance and a further strengthening of bank balance sheets and bank business models are warranted together with much needed fiscal consolidation."

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