The International Monetary Fund has said high debt levels in advanced countries pose a serious risk to the global economy.
It suggests debt levels could be reduced through some form of write-down, including a reduction in the amount of principal due on mortgages. It follows yesterday's statement by AIB that debt forgiveness is one option the bank is exploring.
The third IMF report of the week is the global financial stability report, which warns of the very high debt levels in the advanced economies - both public and private - which this year will exceed 100% of GDP for the first time since World War 2.
It says there are three possible ways to reduce debt: high financial surpluses for several years - in other words saving money not spending it; central banks continuing their low interest policy to support deleveraging; and some form of debt writedown, restructuring or one-off transfer.
The IMF says that the last option can restore borrower viability very quickly, but can disrupt the lenders' finances.
The IMF has examined the top 40 American banks and believes they can afford to write down 15% of the principal owed by mortgage holders. But the report says nothing about the other three countries with big property problems - Spain, the UK and Ireland.
The IMF says that, because so many government are now highly indebted, lenders are becoming more choosy about where they put their money, and are less inclined to invest in countries where there is a risk of sovereign default or bondholder burning.
The IMF's report said unhealthy European banks were the biggest threat to global financial stability, and they need to find fresh capital.
It said Europe would not escape a restructuring of failing banks and a recapitalisation of viable banks. 'But it is likely that some of the capital will need to come from public sources,' the report said.
The IMF said banks worldwide faced 'a wall of maturing debt', with $3.6 trillion due to be repaid over the next two years. Bank debt rollover requirements are most acute for Irish and German banks, the IMF said.
