The International Monetary Fund has warned that the economic crisis could be entering a new phase, with rising government debt threatening to undermine the stability of the global financial system.
In a bi-annual report on economic stability, the IMF said the latest challenge to the world's financial system came as banks were regaining their footing amid a global recovery.
'Risks to global financial stability have eased as the economic recovery has gained steam, but concerns about advanced country sovereign risks could undermine stability gains and prolong the collapse of credit,' the report said.
In its Global Financial Stability Report, the IMF scaled back its estimate of bank writedowns since the start of the crisis to the end of this year to $2.3 trillion, from $2.8 trillion in October. The fund estimated that banks have already written off $1.5 trillion of this.
It said that while the world has avoided a full-blown depression, risks remained due to the fragile nature of the recovery and the continuing repair of balance sheets.
The IMF said there were concerns that governments could reach the 'limits' of their support for the financial system and the real economy.
Banks will need to refinance a large amount of short-term funding this year; investors will want to see more and higher-quality capital in anticipation of tougher regulation, and not all losses have been written down, it said.
'All of these factors are likely to put downward pressure on profitability,' the report said. "In such an environment, the recovery of private sector credit is likely to be subdued as credit demand is weak and supply is constrained.'
