WASHINGTON, Sept 24: The turmoil stemming from the US sub-prime property loan market and tighter credit will have a “far-reaching” impact on the world economy, the International Monetary Fund said on Monday.“
Downside risks have increased significantly and even if those risks fail to materialise, the implications of this period of turbulence will be significant and far-reaching,” the IMF said in its latest “Global Financial Stability Report.”
The IMF said that since issuing its previous report in April, “global financial stability has endured an important test” in the meltdown of the risky US sub-prime mortgage sector that rocked the global financial system in August.
“Markets are recognising the extent to which credit discipline has deteriorated in recent years -- most notably in the US nonprime mortgage and leveraged loan markets, but also in other related credit markets,” said the 185-nation Washington institution, dedicated to fostering monetary stability and financial stability.
The rapid deterioration in global credit conditions as risk was re-priced led to “extraordinary” liquidity injections by a number of central banks to ease market operations, the IMF said.
“The potential consequences of this episode should not be underestimated and the adjustment process is likely to be protracted,” it said.
IMF managing director Rodrigo Rato, speaking in Madrid at the annual meeting of the Club of Rome global think tank, said “these fluctuations are without a doubt serious (and) we do not see a prompt total resolution to the credit crisis.
“The losses in the financial markets and bank balances will take some months to become totally evident,” he said.
The IMF report said that in the context of a benign global economy and “abnormally low” market volatility there was a lack of due diligence in the credit market and an over-reliance on ratings agencies to analyse risks in complex financial instruments.
It underscored that the world economy was experiencing a period of solid growth, especially in emerging markets, when the downturn in the US housing sector began to be felt in the sub-prime mortgage sector, where high-cost home loans are given to people with poor credit histories.
A combination of falling home prices and rising interest rates has squeezed overstretched borrowers, leading to a sharp rise in foreclosures.
The disruption in the United States quickly rocked financial markets, beginning in Europe in August, as investors became aware of the difficulty of determining the value of US mortgage-backed securities which were sold worldwide, the IMF said.
“The rapid transmission of disturbances in one part of the financial system to other parts, sometimes through opaque and intertwined channels, has surprised both market participants and the official sector,” the IMF said.
The US Federal Reserve, the European Central Bank and other central banks pumped billions of dollars into markets to ease the credit crunch.
Some observers have speculated the world’s biggest economy is heading for recession.
“The test is not over yet,” Jaime Caruana, director of the IMF’s monetary and capital markets department, said at a news conference. “This impact, to some extent, will be inflationary.” The report said that “so far, despite the significant ongoing correction in financial markets, global growth remains solid, though some slowdown could be expected.”
The IMF said it was too early to make definitive conclusions about the ongoing turbulence, however greater transparency is needed to reduce uncertainty and a lack of information that is hampering the market’s ability to differentiate and properly price risk.—AFP
