Financial turmoil not 'dramatic' for global growth: IMF
Friday, 24 August 2007
SAO PAULO, Aug 23 (AFP): Financial markets turbulence probably will curb global economic growth slightly this year, the managing director of the International Monetary Fund, Rodrigo Rato, said yesterday.
"It would not be surprising if (the turmoil) had a certain impact on growth, more intense in certain countries than in others," Rato said at a news conference in Sao Paulo, Brazil.
Asked whether the IMF would lower its 2007 global growth forecast of 5.2 per cent, he acknowledged "it is possible, but not in a dramatic way," suggesting a revision to "slightly above 5.0 per cent."
"We are facing a major financial correction on the credit market, in the context of a good economic situation worldwide, that will have some consequences for the economy, probably more for some than others," he said.
Rato stressed that "the risks have increased but in the positive context of the world economy" where the fundamentals remain "good" regarding inflation, debt, trade and growth.
The IMF last month hiked its 2007 and 2008 growth forecasts to 5.2 per cent, from 4.9 per cent, citing robust growth in emerging markets, led by China, during the first half of the year.
Fears of a credit crunch spreading from problems in the US housing sector have gripped financial markets around the world, triggering a series of heavy sell-offs.
The US Federal Reserve, the European Central Bank and other central banks have pumped hundreds of billions of dollars into financial systems in the past two weeks to ward off a seizure that could threaten the world economy.
Rato welcomed the interventions: "The central banks acted in a decisive and appropriate manner to guarantee the liquidity of the markets."
However, he warned that national and multilateral authorities "must remain very vigilant in the coming days."
The turmoil stems from a crisis in the US subprime mortgage sector, where home loans are granted to people with poor credit.
Amid falling home prices and tightening credit after the collapse of the US housing market boom in early 2006, an increasing number of home buyers are struggling, and failing, to make their mortgage payments.
A surge in US home foreclosures and the credit squeeze are forcing home lenders across America to scale back business. Some have declared bankruptcy.
The subprime crisis has affected the broader financial markets, with several Wall Street banks hit with multibillion- dollar trading losses in mortgage-backed securities, spooking investors.
The IMF chief said the turmoil "probably will have an impact on growth in the United States," but that strong corporate profits, robust employment and "moderate" inflation "would play in favor of the soundness of the American economy."
Given the weight of the world's biggest economy, however, the risks to the global economy "lean toward the negative side," he said, affecting world trade, commodities and interest rates.
US Treasury Secretary Henry Paulson said Tuesday that US economic growth would likely be dented by the credit turmoil, but also stressed the strength of the global and US economies.
"This will play out over time and liquidity will return to normal when the market has a better understanding, when investors have a better understanding, of the risk return trade-off," Paulson said.
The chairman of the Eurogroup of eurozone finance ministers, Jean- Claude Juncker, told AFP Wednesday he did not see "a notable risk of impact on growth in the real economy" in the 13- nation bloc. Rato highlighted the turmoil's "favorable" effect of a heightened scrutiny of risk, because "it would not have been good for the excessive complacency with regard to risk evaluation in recent years to continue."
Rato, who unexpectedly announced in June that he would resign in late October, nearly two years before his term ends, is on an official visit to Brazil, South America's biggest economy.
He is scheduled to meet Thursday with Brazilian President Luiz Inacio Lula da Silva and his finance minister, Guido Mantega in the capital, Brasilia.
"It would not be surprising if (the turmoil) had a certain impact on growth, more intense in certain countries than in others," Rato said at a news conference in Sao Paulo, Brazil.
Asked whether the IMF would lower its 2007 global growth forecast of 5.2 per cent, he acknowledged "it is possible, but not in a dramatic way," suggesting a revision to "slightly above 5.0 per cent."
"We are facing a major financial correction on the credit market, in the context of a good economic situation worldwide, that will have some consequences for the economy, probably more for some than others," he said.
Rato stressed that "the risks have increased but in the positive context of the world economy" where the fundamentals remain "good" regarding inflation, debt, trade and growth.
The IMF last month hiked its 2007 and 2008 growth forecasts to 5.2 per cent, from 4.9 per cent, citing robust growth in emerging markets, led by China, during the first half of the year.
Fears of a credit crunch spreading from problems in the US housing sector have gripped financial markets around the world, triggering a series of heavy sell-offs.
The US Federal Reserve, the European Central Bank and other central banks have pumped hundreds of billions of dollars into financial systems in the past two weeks to ward off a seizure that could threaten the world economy.
Rato welcomed the interventions: "The central banks acted in a decisive and appropriate manner to guarantee the liquidity of the markets."
However, he warned that national and multilateral authorities "must remain very vigilant in the coming days."
The turmoil stems from a crisis in the US subprime mortgage sector, where home loans are granted to people with poor credit.
Amid falling home prices and tightening credit after the collapse of the US housing market boom in early 2006, an increasing number of home buyers are struggling, and failing, to make their mortgage payments.
A surge in US home foreclosures and the credit squeeze are forcing home lenders across America to scale back business. Some have declared bankruptcy.
The subprime crisis has affected the broader financial markets, with several Wall Street banks hit with multibillion- dollar trading losses in mortgage-backed securities, spooking investors.
The IMF chief said the turmoil "probably will have an impact on growth in the United States," but that strong corporate profits, robust employment and "moderate" inflation "would play in favor of the soundness of the American economy."
Given the weight of the world's biggest economy, however, the risks to the global economy "lean toward the negative side," he said, affecting world trade, commodities and interest rates.
US Treasury Secretary Henry Paulson said Tuesday that US economic growth would likely be dented by the credit turmoil, but also stressed the strength of the global and US economies.
"This will play out over time and liquidity will return to normal when the market has a better understanding, when investors have a better understanding, of the risk return trade-off," Paulson said.
The chairman of the Eurogroup of eurozone finance ministers, Jean- Claude Juncker, told AFP Wednesday he did not see "a notable risk of impact on growth in the real economy" in the 13- nation bloc. Rato highlighted the turmoil's "favorable" effect of a heightened scrutiny of risk, because "it would not have been good for the excessive complacency with regard to risk evaluation in recent years to continue."
Rato, who unexpectedly announced in June that he would resign in late October, nearly two years before his term ends, is on an official visit to Brazil, South America's biggest economy.
He is scheduled to meet Thursday with Brazilian President Luiz Inacio Lula da Silva and his finance minister, Guido Mantega in the capital, Brasilia.