Bank balance sheets crucial for credit growth - IMF
(31 July 2015 – Europe) The International Monetary Fund (IMF) released its report on Euro Area Policies on 27 July, saying the area’s recovery is strengthening.
Thanks to rising domestic demand and lower oil prices, the European Central Bank (ECB)’s quantitative easing under the expanded asset purchase program and a weaker euro, recovery is improving.
“The improving sentiment, rising inflation expectations, and easing credit conditions suggest that the recovery is likely to continue in the near term,” the IMF said.
In this context, euro area GDP is expected to accelerate from 1.5 percent this year to 1.7 percent next year.
Headline inflation is expected to remain close to zero this year and rise to 1.1 percent next year, reflecting a still large output gap.
While it is mostly a good outlook, the IMF admitted downside risks to the region include lingering weakness and low inflation, a potential slowdown in emerging markets, geopolitical tensions, and financial market volatility, whether from asymmetric monetary policies or contagion from events in Greece.
But the medium-term outlook is subdued, as a chronic lack of demand, impaired corporate and bank balance sheets, and weak productivity continue to hold back employment and investment.
Addressing the weak medium-term outlook requires a comprehensive policy response.
Cleaning up bank balance sheets would encourage banks to lend and firms to invest, while accelerating structural reforms and strengthening further the economic governance framework would help secure lasting growth for Europe and create positive spillovers for the global economy.
IMF Executive Board Directors underscored the urgency of repairing bank balance sheets and severing bank-sovereign links, crucial for credit growth and effective monetary policy transmission.
They encouraged comprehensive action to reduce the high level of non-performing loans, tighten supervision, improve insolvency regimes, and develop distressed debt markets.
Directors stressed the need for common deposit insurance with an effective fiscal backstop, a well-resourced Single Resolution Fund, and ease of access to direct bank recapitalisation from the European Stability Mechanism.
They looked forward to further advancement toward a complete banking union.