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Too early to declare victory in financial crisis: IMF

The world’s economy has stepped back from the brink of financial catastrophe, thanks to a swath of government rescue measures to address the worst crisis in more than 60 years, but it is not entirely out of danger, the International Monetary Fund’s chief economist said.  

“The message from the financial markets at this point is that progress has been made, but it is much too early to declare victory,” Olivier Blanchard wrote in the December issue of Finance & Development magazine published on Thursday. “While the financial crisis has moderated somewhat in advanced economies, it has increasingly engulfed emerging economies,” he added.

Blanchard said coordinated steps by major economies to stabilize markets and banking systems helped shore up the global financial system, but implementation of these programs have been far from perfect. Based on expectations that house prices in the United States and other countries will recover in 2009 and financial deleveraging will ease, the IMF believes that growth in advanced economies will turn positive in 2010.

EVEN EMERGING MARKETS MAY COOL DOWN

After several years of turbo-charged growth, the expansion in emerging and developing economies should moderate as global commodity prices fall and credit remains tight. Any hope that emerging economies would be immune to a slowdown in major economies had disappeared, he added.

The IMF sharply cut its projections for world growth to 2.2% on November 6 and said developed economies are headed for the first full-year contraction since World War II. Blanchard said with interest rates low, and little room in some countries to cut rates further, fiscal stimulus must now play the central role.

“What should be the size of the expansion and which countries should provide the stimulus?,” he asked. “We have come to the conclusion that, at this point, the goal should be fiscal boost of about 2% of global GDP” or gross domestic product. This would translate into a 2% increase in global growth and help the world avoid a deep recession, he said.

CALLING THE FINANCIAL FIREFIGHTERS

He said the immediate task for governments was to extinguish the financial fires and adopt policies to limit the economic damage. In addition, governments should be pro-active in trying to avoid a repeat of the crisis started by reckless lending to the US housing sector. He said governments should tackle the crisis on two fronts: by implementing and refining measures adopted in the past few months to deal with the crisis, and placing more onus on fiscal policy.

Blanchard said if output fell more sharply than expected, more aggressive fiscal stimulus would be needed. The downside of such a move is that countries’ debts will increase in the long run, he added. Turning to the IMF, Blanchard said the financial crisis highlighted the need to sharpen the IMF’s monitoring of the world’s economy and to shore up the IMF’s resources to help troubled economies. (Reuters)