The recovery of the global financial system remains delicate as institutions around the world still have work to do repairing ailing balance sheets, according to a new report from the International Monetary Fund (IMF). An organization of 186 countries forms the IMF, which works to foster global financial cooperation and stability. In its Global Financial Stability Report, the IMF warned that with markets less willing to support leverage, whether on bank or sovereign balance sheets, and still liquidity reserves remain dry, new stability risks threaten the global market. Sovereign risks in highly indebted countries like Greece are spilling over into recovering banking systems, which could undermine financial stability. The uncertain stability reduced expected writedowns in banks from $2.8trn to $2.3trn in Q110, according to IMF. Some bank capital positions even improved substantially. However, there are some segments of country banking systems that remain poorly capitalized and could still face major risks. “The credit recovery will be slow, shallow, and uneven as banks continue to repair balance sheets,” according to the IMF report. “Notwithstanding the weak recovery in private credit demand, ballooning sovereign needs may bump up against limited credit supply.” Suki Mann, a credit analyst for French investment bank Société Générale is somewhat more confident in a recovery, arguing that recent events in Greece and Iceland are minimally impacting the global credit markets. "The earnings season is stepping up a gear and we believe it will offer an upbeat assessment of the corporate sector; the economic data should continue to point to recovery, notwithstanding the side effects of the volcanic eruption; and, credit spreads will continue to go tighter," he said. Looking ahead, the IMF said policymakers need to take further action to continue reducing systemic risks. It called for governments to design credible plans to consolidate and resolve weakened institutions such as the famed destructions of Bear Stearns and Lehman Brothers if the market is to support credit and avoid similar crises in the future. Write to Jon Prior.