By Simon Miller

Financial risks have increased since April according to the latest Global Financial Stability Report from the International Monetary Fund (IMF).

In the update, the IMF blamed mounting concerns about the strength of the global economic recovery for the rise. In addition, continuing concerns about political support for adjustments in Europe's periphery as well as political risks in addressing fiscal adjustment in some advanced economies added to the risks.

Finally, spurred by a sustained period of low interest rates in advanced economies, growing investor search for yield risked building up future financial imbalances, especially in emerging market countries according to the report.

“Policymakers continue to face the possibility of potentially large future shocks to the financial system, with the recent increase in financial risks adding to existing concerns,” said José Viñals, the IMF’s financial counsellor and head of the Monetary and Capital Markets Department.

The IMF said that given recent financial market concerns, policymakers need to intensify and accelerate their efforts to tackle the longstanding financial challenges of budget deficits, banking system vulnerabilities and financial sector reform.

According to the Fund, there had been some work done to repair bank balance sheets, but progress has been slow.

"Some banks are still weighed down by lower quality assets, and important funding challenges remain. The results from the new round of European stress tests will mark an important watershed and banks will need to pick up the pace to rebuild their capital," said the update.

The United States and Japan came under fire from the IMF's Fiscal Monitor - also published today - for being slow in coming up with specific plans to bring down their high debt levels while debt problems in some European countries mean financial markets are charging high rates to lend them money. The IMF said that given recent financial markets’ concerns, policymakers need to speed up efforts to tackle the longstanding financial challenges of government risk, banking system vulnerabilities, and the unintended consequences of low interest rates.

In its latest Fiscal Monitor, the IMF said the US deficit will be lower in 2011 than forecast in April. This is due to revenue increases, in part because of sizable capital gains in 2010, coupled with lower expenditures. As a result, the planned cutbacks for 2012 will not need to be as steep to meet the targets set by the government.

“What remains missing in the United States, however, is a political consensus on a comprehensive and balanced set of specific measures to underpin a credible medium-term adjustment plan with objectives endorsed by Congress,” said Carlo Cottarelli, head of the IMF’s fiscal affairs department, which produced the report. “Without such a plan, yield on U.S. government paper would start reflecting a risk premium, which would not be good for the U.S. and the world economy.”

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