The IMF and OECD, two top world economy forecasters, struck alarmist notes March 17 about crisis and threatening stagflation in the financial system and the need for measures to shore it up as markets sent distress signals. Only hours after the U.S. Federal Reserve took emergency weekend action to keep the U.S. financial system afloat with cash, the head of the IMF warned that the world economy was being hit by an "important slowdown." Consequently, IMF growth forecasts would be cut further because of the crisis. "The downside risks have materialized."
"Obviously the financial market crisis is now more serious and more global than a week ago," Dominique Strauss-Kahn said, warning that there was a "risk of (it) worsening." The crisis would be long, would hit hard and spread to emerging economies, he predicted.
So far, central banks had managed problems of liquidity in the financial system well and he said he had "no reason to believe they won't be able to" in coming weeks. "At this time, the priority for European governments should be containing the economic damage from the financial market crisis," he told a joint conference with the OECD. "This is difficult because we are in an economic environment where inflation and recession are both potential problems."
And the head of the Organization for Economic Cooperation and Development said that financial authorities had to send signals that they were ready to do everything needed to shore up the financial system and avoid systemic risks. OECD secretary general Angel Gurria said the priority had to be stability of the system: "In the short term (they) have to send out a signal" such as the rescues of the British Northern Rock bank and of U.S. investment bank Bear Stearns at the weekend.
Strauss-Kahn insisted that the crisis only highlighted the need for structural reforms in European economies to increase their competitiveness and productivity so that they could generate the growth needed to sustain the European model of justice and dignity.
Copyright Agence France-Presse, 2008