Historic levels of government debt in the developed world could throw the global financial system back into crisis and clear plans are needed to bring it under control, the International Monetary Fund said Tuesday.
In one of its first broad surveys since the recent recession gave way to renewed growth, the agency said that "sovereign risk" -- the chance that sovereign nations have racked up so much debt they won't be able to borrow enough money to pay their bills -- is now perhaps the central threat to the global financial system.
Governments in the United States and across Europe have accumulated levels of debt not seen since World War II as the recession crimped tax receipts, spending rose on entitlement programs, and emergency measures were put in place to support the economy.
"The crisis has lead to a deteriorating trajectory for debt" among developed countries, which could cause higher interest rates and slower growth and weaken the broader financial system, the IMF said. Government debt could "take the credit crisis into a new phase, as nations begin to reach the limits of public sector support for the financial system and the real economy."
The IMF's latest Global Financial Stability Report was released Tuesday morning ahead of meetings this week between the fund and the finance ministers of the G-20 group of economically important countries.
The report said that in many ways the financial system had stabilized, and that some aspects of the recent crisis had proved less severe than initially thought. The agency's estimate of how much banks will have to write off in bad loans, for example, was reduced by $500 billion, to $2.3 trillion.