IMF head warns on impact of credit crisis

FE Team | Published: October 09, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Krishna Guha
FT Syndication Service
WASHINGTON: The credit squeeze will force governments worldwide to make substantial changes to their budget plans, Rodrigo Rato, outgoing managing director of the International Monetary Fund, has warned.
Mr Rato said the credit squeeze was a "serious crisis" that was not over yet and would curtail growth worldwide.
"Policymakers should not think that the problems will stay at the desk of the bankers," he said. "Problems are going to come to the real sector, come to the budgets - that is something we keep telling people."
His comments came during an interview with the Financial Times in which he appeared to endorse European concerns about the decline in the dollar; a subject that threatens to be a cause of discord at the Group of Seven summit and IMF annual meeting this month.
Mr Rato said the dollar is now "undervalued" on many measures - an unusually bold assessment. He warned against excess volatility in currency markets. "What we would like to see is not sudden changes," he said.
Eurozone finance ministers in their meeting in Luxembourg are expected to hammer out a common position on the dollar in advance of the G7 and IMF meetings.
The credit crisis was "not a storm in a teacup," the IMF managing director said.
While the crisis may not continue to rage with the same intensity as before, it would take "a few months, probably into next year" before liquidity, availability of credit and risk spreads would return to more normal levels, he said.
Mr Rato said the market crisis "is going to have an impact on growth" and that this will force finance ministers to revise their budget assumptions.
Many appear reluctant to do so, he added.
Since the credit crisis originated in the financial markets of the "most sophisticated" economies, its impact would be felt "more quickly" in the US and to some extent in Europe and Japan rather than in the rest of the world, Mr Rato argued.
"The US is going to slow down," he said. "Growth in Europe looks less strong than before, and in Japan too - though Japan will probably stay [at about] potential."
But he cautioned against assuming the developing world could decouple completely from the US. "Everybody is going to feel some impact," he said.
The outgoing IMF chief said many of the big emerging markets are growing rapidly.
But "to what extent they will keep that momentum will depend on how long the slowdown is in the US and Europe".
Mr Rato said emerging markets with large current account deficits would be much more vulnerable to changes in the availability and price of credit than those in a "more balanced situation".
Dominique Strauss-Kahn, a former French finance minister, is poised to take over from Mr Rato as head of the IMF at the end of October.