The IMF expressed concerns over the high vulnerability of sovereign balance sheets to growth shocks, releasing its semi-annual “Global Financial Stability Report (GFSR)” this week. The report said the recent sovereign debt crisis in Europe highlighted the increased vulnerabilities of banks and sovereign balance sheets emanating from the Euro crisis. Though mature economies are transitioning from temporary support to self-sustaining private demand, the policy makers must stick with fiscal tightening and regulations unless private demand becomes more self-sustainable.
The IMF is still not ready to advocate the withdrawal of fiscal support, (termed nicely as “temporary support” in the report) unless the “still-impaired financial sector” is proven to be out of risk from its toxic mortgage debt assets. Until then, fiscal tightening measures have to be continued, and of course, without caring for working class people’s protests and agitations, at the cost of budget spending for the people.
Government Role in Recovery
The IMF report acknowledged the role of the government in recovery from the financial crisis. It said in its report, “To a large extent, the apparently modest capital needs of U.S. banks reflect the large scale of government-sponsored enterprises and other government interventions without which those needs would have been substantially higher. This highlights the extent to which risk has been transferred from private to public balance sheets, as well as the need to address the burden placed on public institutions.”
Even while recognizing this, the IMF looks for self-sustaining private demand where private demand is still based on temporary support from the government. The government's need to interfere where private firms that are “too-important-to-fail,” (referring “too big to fail”) fail to deliver, but private firms do not come to rescue the government from the difficulties of maintaining fiscal discipline and from lacking funds for social welfare measures. Even then, the governments are inclined to resort to spending cuts, withdrawal of welfare measures, wage freezes, benefit cuts and so on.