Take more action to support the recovery —including unconventional measures

09-09-2011 • Businessinsider.com

New IMF Chief Christine Lagarde pissed off a lot of people recently at Jackson Hole when she said European banks urgently needed to raise capital. She repeats this claim in a speech today in London. This time notably she admits that the capital may be needed to settle the markets more than it is needed objectively: As this process unfolds, we should see a decline in sovereign risk—which should go a long way in removing some of the uncertainty weighing on European banks. As I have said before, this will take time. In view of the heightened risks and uncertainties—and the need to convince markets—some banks need additional capital. We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis. That is why action is needed so urgently so that banks can return to the business of financing economic activity. Lagarde also encourages central banks to remain accommodative, saying that inflation risk has receded: