IMF Chief Sees 'Major' Slowdown In Global Economy

Source : The Straits Times, Apr 4, 2008

WASHINGTON - INTERNATIONAL Monetary Fund managing director Dominique Strauss-Kahn said on Thursday he sees a 'major' slowdown in the global economy this year amid a credit market crisis.

'What is certain is that the situation is very serious and that the slowdown in the United States, and subsequently in the rest of the world, is a slowdown that is going to be major,' he said in an interview with AFP ahead of next week's IMF and World Bank spring meetings.

'It is not a catastrophic slowdown, but it is a major slowdown,' he stressed, five months after becoming managing director of the 185-nation institution.

The IMF is set to cut a half point off its 2008 forecast for global economic growth to 3.7 per cent on Wednesday, Mr Strauss-Kahn said, confirming media reports but without providing further detail.

The IMF, whose mission is to promote global financial stability, is to publish its economic growth forecasts in its biannual World Economic Outlook report next Wednesday.

In January, the IMF projected the global economy would expand by 4.1 per cent and the US economy would grow by 1.5 per cent in 2008.

On Tuesday and Wednesday, media reports in Germany said the IMF would lower the global growth projection to 3.7 per cent and that of the US to 0.5 per cent.

The IMF and the World Bank hold their spring meetings on April 12-13 in Washington.

Mr Strauss-Kahn, a former French finance minister who will preside for the first time over the meetings, said that while the United States and European countries are the principal victims of the credit crunch, emerging countries, which have been a global pole of dynamic growth, would also be affected.

'I am particularly concerned about the central European countries,' he said, without identifying the vulnerable countries except to say they are members of the European Union.

Separating bad risks from good risks
To tackle the root of the credit crisis that stemmed from a meltdown in the US housing market, the IMF is mulling a structure that would isolate the risky assets from the rest of the financial system.

'The way to get out of the crisis, is to effectively separate the bad risks from the good risks,' Mr Strauss-Kahn.

That would allow a renewal of confidence and revive the interbank market, where credit flows are down to a trickle.

'Today we have banks that no longer lend to each other because they lack confidence - that is what is freezing up the market,' he said.

He said the crisis represent 'a multilateral question, that is why the Fund has a particular role to play in the matter.' To play such a role in the current crisis in any case offers a welcome visibility for the Washington-based institution, which is under fire as being obsolete, despite reforms it is undertaking.

On that point, Mr Strauss-Kahn called a 'a very big political success' a plan to reform the voting rights system approved by the IMF board last Friday to give more voice to the developing and emerging member nations but criticized as not going far enough.

'If that step wasn't taken, the institution's reform would have been blocked for 15 years,' he said.

The board voted to transfer 1.6 per cent points of voting rights from the developed countries to their developing and emerging peers.

The reform plan, in tripling the base voting rights - a measure that mainly benefits the poorest countries, 'soundly takes into consideration the existence of people above their economic weight,' he said. -- AFP