WASHINGTON — If governments do not forge a coordinated response to the financial crisis, it could spill over to emerging markets, the International Monetary Fund said on Wednesday in warning that the world’s “mature” markets” face their biggest challenge since the Depression.
“The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s,” the I.M.F. said in its Global Financial Stability Report, which represented the fund’s gloomiest forecast in years.
“Today’s G.S.F.R. report shows how serious a crisis we currently face,” said Dominique Strauss-Kahn, the managing director of the fund. “I therefore call on policy makers to urgently address the crisis at a national level, with comprehensive measures to restore confidence in the financial sector. At the same time, national governments must closely coordinate these efforts to bring about a return to stability in the international financial system.”
The I.M.F. forecast, written before Wednesday’s coordinated interest-rate cut by the central banks, noted that the global economy was “being buffeted by an extraordinary financial shock,” and that “the situation remains highly uncertain as this report goes to press.”
The report’s executive summary said that an overall recovery was “not yet in sight” and would probably be “gradual when it comes.” The advanced economies of the world are likely to be “in or close to recession” through early 2009, and the anticipated recovery later in 2009 “will be exceptionally gradual by past standards,” the summary said.
Nor did the report see any quick revival even with “successful implementation” of Washington’s just-enacted recovery program based on government purchases and eventual resale of troubled mortgage-related securities.
“Furthermore, additional credit losses are very likely, as the global economy decelerates,” the report predicted.
The I.M.F. estimates that all told, the amount lost by banks because of mortgage-related assets could rise to $1.4 trillion, an increase from $945 billion in its last report in April. The banks have already taken account of $560 billion of the losses in markdowns, the report estimates, but the recent collapse in share prices and the freezing of the credit market have made it difficult for the banks to raise fresh capital.
The I.M.F. forecast an end to the housing slowdown in the United States, but not without additional pain. The housing industry “is expected to finally reach bottom in the coming year, ending the intense drag on growth that has been present since 2006,” the I.M.F. report said.
On the other hand, the report warned, “the U.S. housing market deterioration could be deeper and more prolonged than forecast, while European housing markets could weaken more broadly.”
The I.M.F. urged governments to make direct capital injections into banks, as well as buy distressed assets, which the Bush administration plans to do in its $700 billion rescue program. “In Western Europe, restoring confidence now requires a decisive commitment to concerted and coordinate action,” the executive summary — again, written before Wednesday’s action by central banks — continued.
Among emerging markets that are vulnerable, the fund pinpointed Central and Eastern European countries, which depend on credit from foreign banks and investors. That capital has dried up, the report said.
The document is at once critical of unspecified government officials, declaring that, in hindsight, “lax macroeconomic and regulatory policies may have allowed the global economy to exceed its ‘speed limit,’ ” and sympathetic to them.
“Policy makers Between a Rock and a Hard Place,” one section begins, acknowledging that officials face a “daunting task” in trying to stabilize conditions while “nursing their economies through a period of slower growth and containing inflation.”
“The Achilles’ heel of an active fiscal policy remains political economy settings that foster short-term decision-making,” the report said, adding that “many countries fail during good times” to provide for enough “effective discretionary stimulus” in bad times.
What is more, the I.M.F. said, “the financial turmoil has revealed that national stability frameworks have failed to keep with financial market innovation and globalization, at the price of deleterious cross-border spillovers.”
In other words, regulations have apparently not kept up with increasingly complex deal-making in a financial world made smaller by instant communications and computerized transactions.
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