It is hard to know how far the global financial crisis still has to run, with the extent of further credit losses hinging on what happens to the US housing sector, IMF chief Dominique Strauss-Kahn said on Wednesday.
A further decline in house prices would lead to fresh write-offs at banks and insurers. On the other hand, some say markets have already discounted further losses, he told Reuters. “It’s very difficult to say if the biggest part of the financial crisis is already behind us or not. What is sure is that the consequences for the real (economy) sector of the financial crisis are still in front of us,” Strauss-Kahn, the International Monetary Fund’s managing director, said. Speaking on the sidelines of the annual Group of Eight (G-8) summit in northern Japan, he said the time for countries to use fiscal policy to support growth had passed. Strauss-Kahn raised eyebrows in February when, defying IMF policy orthodoxy, he urged governments to cushion the impact of the credit crisis by spending more or cutting taxes.
Some countries, notably the United States, had duly responded with fiscal stimulus, and there was still a need for developing countries to give targeted handouts to poor people hit by surging oil and food prices, he said. “But the time, when support for growth could partly come from fiscal policy is probably already behind us,” he added. Turning to exchange rates, Strauss-Kahn reaffirmed the IMF’s view that the dollar is close to its medium-term equilibrium value when measured against a basket of currencies of America’s trading partners and adjusted for inflation.
“The euro is probably slightly on the strong side, while other currencies like the renminbi are obviously undervalued,” he said. Although the United States needs to boost net exports to offset weakening domestic demand, Strauss-Kahn said a competitive exchange rate was not the only driver of exports. “Prices are important, of course, but quality, service and other things that go with exports are more and more important,” he said. “It’s not only a simple mechanical question of the exchange rate.”
Ties between the IMF and China have been strained since the fund introduced new currency surveillance rules in June 2008 that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports. Beijing objected to the rulebook, regarding it as a ploy by the United States to enlist the fund in its campaign for a stronger yuan. The dispute delayed completion of the IMF’s 2007 report on China under Article 4 of the Fund’s charter.
Strauss-Kahn said the 2007 review would be folded into this year’s, which would be debated by the IMF’s board of directors in late August or early September. “I have repeatedly said that the renminbi was significantly undervalued, and the board is going to give its own comment on this during the Article Four in six, seven weeks from now.” “The discussions are taking place and we will see -- but I won’t tell you know -- what exactly the IMF staff is going to write and how the board of the IMF is going to react,” he said. Beijing is worried that an IMF finding that the yuan is fundamentally misaligned could expose it to trade sanctions.
The yuan, also known as the renminbi, has risen more than 20% against the dollar since Beijing scrapped its peg to the dollar in July 2005 and let the currency float in managed bands. But it has risen much less against other major currencies. Strauss-Kahn said the IMF’s discussions with China revolved around how fast the yuan should appreciate. “The Chinese authorities are quite aware of the fact that it is in their own interest to move the exchange rate -- to revalue the real exchange rate. They are facing a high level of inflation and they also have other undesirable consequences of this undervalued exchange rate. But of course it’s not easy to do. We all have to understand that the move has to take place but to take place progressively.” (Reuters)