Credit Crisis, Food Prices Plague Economy Midterm

Source : The Business Times, September 2, 2008

BUENOS AIRES (Argentina) - The US credit crisis has not hit bottom and world food prices have not yet peaked, making continued financial volatility likely in the midterm, central bankers and international economists said on Monday.

'It's likely that the market adjustment process will continue for a considerable period of time, and there is significant uncertainty about its impact on the economy,' European Central Bank vice president Lucas Papademos told a Buenos Aires forum that drew experts from more than 30 countries.

Trade and investment flows have linked world economies, allowing US economic troubles to spread and dashing hopes of the financial 'decoupling' some thought would protect emerging economies, US Federal Reserve Board Governor Randall Kroszner said.

More than US$500 billion in sub-prime related losses by many of the world's biggest banks is drying up credit and slowing growth, prompting policy makers to cut interest rates in a bid to boost economic activity. But rising food and energy prices also are driving inflation worldwide - making those interest rate cuts increasingly complicated.

Turkey's Central Bank president Durmus Yilmaz said he expected food prices to keep climbing for the rest of the year, as increased food production fails to keep pace with swelling demand from China and India. Food price hikes accounted for 70 per cent of all inflation in Turkey last year, up from just 10 per cent in 2006, Mr Yilmaz said.

In Argentina, Central Bank president Martin Redrado stressed that volatile world markets, and not Argentine economic policy, pose the biggest risk to growth.

The US$47.2 billion in foreign currency reserves Argentina has accumulated since its historic 2001 default are helping it withstand economic shocks from abroad, he said.

Still, 'until the real estate market reaches its bottom, we won't see any reduction in financial market volatility,' he said. -- AP