From the FT

Governments might have to intervene with taxpayers’ money to shore up the financial system and prevent a “downward credit spiral” from taking hold, the International Monetary Fund said on Wednesday.

Mr Lipsky said: “I fully recognise an appropriate role for public sector intervention after market solutions have been exhausted.”

He urged policymakers to “think the unthinkable” and prepare now for what they would do if the worst case scenarios materialised and “low probability but high impact events” threatened to jeopardise global financial stability.

Mr Lipsky warned: “The risks of further escalation of this crisis are rising and decisive policy action will be needed.”

He said this crisis was different from recent past crises because both the financial markets and the banking system “have faltered simultaneously”. The first priority had to be to reverse the “spreading strains” in global financial markets and restore the functioning of the financial system in advanced economies.

Mr Lipsky said there should be no let up in the pressure on financial institutions to disclose losses but said pressure to deleverage “needs to be kept orderly”.

He also urged banks to recapitalise to avoid shrinking their balance sheet.

IMF, recession

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