Global financial crisis to have 'far-reaching' impact: IMF
WASHINGTON (AFP) — The turmoil stemming from the US subprime property loan market and tighter credit will have a "far-reaching" impact on the world economy, the International Monetary Fund said Monday.
"Downside risks have increased significantly and even if those risks fail to materialize, the implications of this period of turbulence will be significant and far-reaching," the IMF said in its latest "Global Financial Stability Report."
The IMF said that since issuing its previous report in April, "global financial stability has endured an important test" in the meltdown of the risky US subprime mortgage sector that rocked the global financial system in August.
"Markets are recognizing the extent to which credit discipline has deteriorated in recent years -- most notably in the US nonprime mortgage and leveraged loan markets, but also in other related credit markets," said the 185-nation institution, dedicated to fostering monetary stability and financial stability.
The rapid deterioration in global credit conditions as risk was repriced led to "extraordinary" liquidity injections by a number of central banks to ease market operations, the IMF said.
"The potential consequences of this episode should not be underestimated and the adjustment process is likely to be protracted," it said.
IMF managing director Rodrigo Rato, speaking in Madrid at the annual meeting of the Club of Rome think tank, said "these fluctuations are without a doubt serious (and) we do not see a prompt total resolution to the credit crisis."
"The losses in the financial markets and bank balances will take some months to become totally evident," he said.
The IMF earlier this month warned it would be scaling back its growth forecasts for the United States and the eurozone, in October, amid the financial turbulence that erupted in August.
In a July report, the IMF had revised higher its projections for global growth in 2007 and 2008 to an annualized clip of 5.2 percent respectively, compared with a prior estimate of 4.9 percent.
The IMF report underscored that the world economy was experiencing a period of solid growth, especially in emerging markets, when the downturn in the US housing sector began to be felt in the subprime mortgage sector, where high-cost home loans are given to people with poor credit histories.
A combination of falling home prices and rising interest rates has squeezed overstretched borrowers, leading to a sharp rise in foreclosures.
The disruption in the United States quickly rocked financial markets in August, as investors became aware of the difficulty of determining the value of US mortgage-backed securities which were sold worldwide, the IMF said.
"The rapid transmission of disturbances in one part of the financial system to other parts, sometimes through opaque and intertwined channels, has surprised both market participants and the official sector," the IMF said.
The US Federal Reserve, the European Central Bank and other central banks pumped billions of dollars into markets to ease the credit crunch.
Last week the Fed cut its federal funds rate by a hefty half point to 4.75 percent, after holding the benchmark rate steady since June 2006, saying it was acting to forestall risks to the US economy from the financial turmoil.
Some observers have speculated the world's biggest economy is heading for recession.
"The test is not over yet," Jaime Caruana, director of the IMF's monetary and capital markets department, said at a news conference. "This impact, to some extent, will be inflationary."
The report said that "so far, despite the significant ongoing correction in financial markets, global growth remains solid, though some slowdown could be expected."
The IMF said it was too early to make definitive conclusions about the ongoing turbulence, however greater transparency is needed to reduce uncertainty and a lack of information that is hampering the market's ability to differentiate and properly price risk.
Ratings agencies should have a more differentiated scale of ratings for complex products so that investors can better evaluate risk, it said.
The IMF will update the report on October 16, four days ahead of the opening of the annual IMF meeting, Caruana said.
