IMF warns on Europe, Japan debt problems
A possible global economic slowdown sparked by Europe's sovereign debt problems could affect currency and stock markets and weigh heavily on Japan's growth prospects, an International Monetary Fund official warned on Wednesday.
February 09, 2011 / 10:19 IST
A possible global economic slowdown sparked by Europe's sovereign debt problems could affect currency and stock markets and weigh heavily on Japan's growth prospects, an International Monetary Fund official warned on Wednesday.
Japan's large debt burden is also unsustainable in the long term although its bonds are likely to avoid speculative attacks in the market due to high domestic savings, said Naoyuki Shinohara, deputy managing director of the IMF.Euro zone countries are working on a comprehensive package of measures to address their year-long debt crisis, with the aim of completing a deal by the end of March, but a lack of consensus over details has slowed their negotiations.Increased signs of disagreement in Europe could damage confidence in Europe's ability to prevent sovereign debt woes from spreading to other countries, potentially pushing up yields on government debt. Standard & Poor's downgrade of Japan last month also has some investors questioning who will be next."The Japanese banking system is facing a number of external downside risks, including a possible global economic slowdown stemming from European sovereign debt problems, a possible slowdown in US growth, and a potential reversal of property boom in emerging markets, such as in China," Shinohara said at a seminar."Such external shocks could affect equity and foreign exchange markets, and could weigh heavily on Japan's economic growth prospects." There is a strong chance the lending capacity of the European Financial Stability Facility, the euro zone bailout fund, will be increased. The nominal size is 440 billion euros (USD 600 billion), but because of a system of guarantees to secure a triple-A credit rating, the special purpose vehicle has an effective lending capacity of only around 250 billion euros.However, smaller European countries have protested against a French and German proposal to write limits on government debt into national laws.Moody's Investors Service is likely to provide a sobering assessment of the poor state of public finances in many countries at a briefing in Tokyo on February 9, but no action on ratings is expected.Yields in many countries have been on the rise as the global economic recovery improves and inflationary pressure picks up.Some investors worry that if yields start rising further due to worries about fiscal discipline, borrowing costs would rise and growth would slow in many debt-laden nations, making it harder to pay down debt.(USD 1=.7335 Euro) Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
