Most rich nations stagnant or near recession -- IMF
By Lesley Wroughton
Reuters
First Posted 08:29:00 09/19/2008
Filed Under: Economy, Business & Finance
WASHINGTON -- Most of the world's developed countries are at an economic standstill or on the brink of recession and policy-makers need to take aggressive action to avert a deep global downturn, a top IMF official said on Thursday.
"Nearing the end of the year's third quarter, most advanced economies are either virtually stagnant or on the verge of recession, while underlying inflation risks are becoming increasingly well-contained," John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech to the Center for Strategic and International Studies.
A "damaging global recession" could still be avoided, he said, but any recovery would likely be gradual, and public funds may be necessary to safeguard the financial system.
"A more systematic approach may be needed to deal with such basic issues as the disposition of distressed assets, the degree of protection offered to depositors, and the scale and scope of liquidity support that is offered to institutions and markets," he said.
As Lipsky spoke, news reports said the Bush administration is considering a plan to create a federal agency similar to the 1990s-era Resolution Trust Corp. to take on problem assets from financial institutions.
Lipsky told reporters afterwards such a step would be one of the broad measures that would be appropriate at this time, especially during turbulent times that makes it difficult to value assets. "The need is for a broad approach, a consistent approach, one that is not piecemeal," he added.
Lipsky said more financial institutions will fail but he stressed that a systemic failure should be avoided.
"It is also very clear this needs to be done in an internationally coherent and decisive way," he said, referring to coordinated central bank responses to throw a lifeline to markets amid upheavals on Wall Street and to free up bank-to-bank lending.
While US and European banks hurt by the year-long credit crisis have raised capital, "these infusions are still some $150 billion less than the write-downs, and further capital raising will become much more expensive, if not impossible," he said.
The slowdown in developed countries should help contain inflation and the IMF believed monetary policy was broadly appropriate across most advanced economies, but there was scope for both the European Central Bank and the Bank of England to lower interest rates, Lipsky said.
In emerging economies, most countries could take a "wait-and-see" approach on interest rates, although some were still grappling with serious inflation risks and their monetary policy should have a tightening bias.
Lipsky said so far emerging markets have been relatively insulated from the financial turmoil, in part because many have been capital exporters and have current account surpluses.
But he warned that these economies could face large reversals of capital flows, with serious implications for their economies' activity and financial institutions.
He said the IMF was closely watching access by these countries to international markets, especially for emerging markets that depend on large-scale capital inflows to finance current account deficits.
More recently, there are signs that capital is beginning to flow out of many emerging economies, reflecting less appetite for risk and slowing growth prospects, he said. These outflows pose risks and warrant close attention, Lipsky added.
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