Yesterday, the IMF released chapter 1 of its biannual Global Financial Stability Report. The release of chapter 1 follows the IMF’s release of chapters 2 and 3 last Wednesday.

Chapter 1 of the report addresses economic uncertainty, sovereign risk and financial fragilities and provides policy reform recommendations. According to the report, “[t]he global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery.” The IMF notes that “fiscal risks remain elevated, particularly in advanced economies where public sector balance sheets have significant weakness” and cites “the recent turmoil in sovereign debt markets in Europe” as a current issue. However, the report also notes that unlike the advanced economies, “emerging markets have proven very resilient …” and “most have continued to enjoy access to international capital markets.”

In order to “address risks” and “safeguard the recovery,” the report proposes certain policy reforms: “(1) deal with the legacy problems in the banking sector, including, where necessary, recapitalization; (2) strengthen the fundamentals of sovereign balance sheets; and (3) continue to clarify and specify regulatory reform, building on the substantial improvements proposed by the Basel Committee on Banking Supervision.”