IMF warns financial market turmoil will continue

Angela Balakrishnan
Monday September 24, 2007
Guardian Unlimited

The impact from the turmoil in financial markets will continue to be felt next year with the US bearing the brunt of the slowdown in economic growth, the International Monetary Fund predicted today.

IMF managing director Rodrigo de Rato said that world growth should remain firm, but will be below levels seen this year and last as downside risks intensify due to the global credit crunch.

The longer the crisis continues, the worse the impact will be, Mr De Rato warned in the IMF's twice-yearly Global Financial Stability report, published today.

"The consequences of the turmoil should not be underestimated. The implications will be significant and far reaching. Credit markets are correcting, but slowly. We aren't at a stage of normality," Mr De Rato said.

Mr De Rato added that most countries should be able to cope with the financial conditions, which he said will have a particular impact on America next year.

"It has an effect on the real economy which will be felt more in 2008, with greater intensity in the United States, less in other areas."

The IMF believes that the period ahead could be difficult as bouts of turbulence are likely to recur, which will prolong the adjustment process.

"Uncertainty regarding overall losses and exposure has raised market and liquidity risks, with potentially broader implications for financial institutions," the report said, adding that a few more months were needed to access the full impact on banks, companies and governments.

The IMF also said there was no quick fix for the credit squeeze sparked by a surge in defaults on US sub-prime home loans to borrowers with poor credit histories.

Financial institutions have become more cautious about lending money to each other in an attempt to limit exposure to the US sub-prime loans that were sold around the world to investors willing to buy packages of asset-backed securities.

Mr De Rato said it was not yet clear whether the credit crisis represented a change in economic cycle or a temporary slowdown in growth.

Central banks have tried to alleviate the credit woes by injecting more liquidity in money markets. The Federal Reserve cut interest rates last week for the first time in over four years, by 50 basis points to 4.75%.

However, the IMF warned that the chances of a more severe tightening of credit conditions could not be dismissed.