IMF Chief Says Worst Of Financial Crisis Is Over

Source : AFP, May 15, 2008




BRUSSELS: The worst of the financial sector crisis is over although the impact on the broader economy will likely drag on in coming months, IMF managing director Dominique Strauss-Kahn said on Thursday.

"There are good reasons to believe that the largest part of disclosure in financial institutions has been done, especially in the United States ... so that the worst news is behind us," he told a panel at the European Parliament.

"The main problem is the linkages between the financial crisis and the real economy and this is not behind us," he said, estimating that the financial turmoil would weigh on economic activity for another "several quarters."

Growth has slowed in most major economies in the wake of a slump in the US housing market, which has triggered extreme financial market volatility and reluctance among banks to make all but the safest loans.

However, Strauss-Kahn acknowledged later at a conference on the euro that it was impossible to know exactly whether the worst of the financial crisis was over or not because there were good reasons to argue that it is not.

"We don't know exactly where we are," he said, adding that there was a sound argument that because "the housing market in the United States still has prices going down ... the source of the problem is still there."

After months of nerve-wracking swings in financial markets, optimism has begun to emerge among market participants that the worst of the storm has blown over since the collapse of the US investment bank Bear Stearns in mid-March.

While past financial crises tended to be triggered by problems in developing countries, often with current account problems, Strauss-Kahn warned that in the long-term, the recent turmoil would likely be "a taste of the new kind of crisis that we are going to face."

With big developed economies such as the United States and Europe slowing following the turmoil, Strauss-Kahn said emerging countries would be the biggest motors behind world growth this year.

Nevertheless, he insisted that such fast growing economies would also eventually feel the impact of the slowdown in rich countries, although perhaps with "some delay."

"In no way is there some sort decoupling" between economic growth trends in developed countries and emerging economies, he said, weighing into one of the hottest debates currently in economics.

Strauss-Kahn said the coming months would reveal just how well the European economy can hold up.

"The resilience of the European economy is at stake," he said. "The slowdown of 2001 is not very assuring - it took a lot of time to recover.

"The coming six months, or maybe nine months, are certainly a very interesting stress test for the European economy.

The eurozone economy rebounded with unexpected growth of 0.7 percent in the first quarter this year, according to initial official estimates issued on Thursday.

The growth in the 15 countries sharing the euro beat both economists' predictions and the 0.4-percent growth recorded in the last quarter of 2007, thanks largely to bumper 1.5 percent expansion in Germany, the data showed. - AFP/de