IMF urges global leaders to cooperate on financial market concerns

Posted Apr 14th 2008 1:47PM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Economic Data, Politics, Recession

An International Monetary Fund steering committee is urging global leaders to cooperate to deal with the current financial crisis, which the IMF concludes is global in scope.

In its communiqué following its spring meeting, the IMF said it was meeting at a time of "unusual uncertainty regarding global economic and financial market prospects." The IMF added that the challenges facing the world economy are of a global nature, requiring strong action and close cooperation among the membership.

Cites financial instability, credit crunch

The IMF said global financial instability has increased since its last meeting. Further, global economic growth has slowed and growth prospects for 2008 and 2009 have deteriorated, adding that risks to the outlook come from the still unfolding events in financial markets and from the potential worsening of the housing and credit cycles. (Earlier this year the IMF cut its 2008 global GDP growth forecast to 3.7% from 4.2%)

Meanwhile, for developed economies, the IMF said monetary policy should continue to aim at medium-term price stability, while responding flexibly to signs of a more pronounced and prolonged economic downturn. The IMF also endorsed fiscal stimulus, at least temporarily, as an appropriate engine of growth and as a stimulus tool, saying fiscal policy can also play a useful, counter-cyclical role. In the United States, "temporary fiscal easing will help to counter downside risks to growth," the IMF said.

Central bank action supported

In addition, the IMF also welcomed major central bank action (U.S. Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Canada) to provide liquidity support to ease strains in interbank markets, and called for "continued vigilance to deal with the financial turmoil." Also, prompt actions by large financial institutions to disclose losses and repair balance sheets by raising capital when necessary, along with efforts to mobilize medium-term funding, will contribute to restoring confidence, the IMF added.

Economic Analysis: Two key points stemming from the IMF's spring meeting: 1) its reiteration of fiscal stimulus as a tool to jump-start the anemic U.S. economy and to stimulate global growth, and 2) although it originated in the United States, and has major downside implications for growth there, the IMF views the credit crunch as a global problem, affecting all major financial markets and economic regions. The fiscal stimulus point is particularly cogent, as it reinforces an earlier IMF statement on the topic. Moreover, investors/traders should heed the comment as a statement on the serious economic conditions facing major economies because the IMF is not a 'casual' endorser of public spending.

One bright point from the current global economic slowdown: a reduction in the U.S. trade deficit stemming from its slower growth. However, the IMF also noted that long-term structural imbalances still have to be addressed in the United States and elsewhere. In the U.S., savings must increase, along with reduced consumption.

Tags: credit crunch, current account, emerging markets, exports, financial crisis, fiscal policy, GDP, global growth, IMF, imports, International Monetary Fund, inthenews, monetary policy, trade