IMF WARNING:IMF MANAGING director Dominique Strauss-Kahn has warned that the world economy, already under pressure from high prices for oil and other commodities, faces a "major slowdown" as a result of the financial crisis.
Mr Strauss Kahn said many emerging market countries would suffer spillover effects from the turmoil which brought the financial system to the brink of meltdown in mid-September.
"Financial conditions are expected to remain very difficult, restraining global growth prospects," he said in a speech to the IMF's monetary and financial committee.
The committee endorsed the action plan agreed by finance ministers and central bankers from the G7 group, stating that the depth and systemic nature of the crisis called for exceptional vigilance, co-ordination and readiness to take bold action.
Egyptian finance minister Youssef Boutros-Ghali, the committee's chairman, stressed that all 185 members of the IMF supported the G7 initiative. "We are committed to the plan of action," he said. "This is an essential element for restoring confidence."
The bleak assessment of international economic conditions was shared by Joaquin Almunia, European commissioner for economic and monetary affairs, who told the committee that the outlook for the EU economy "has turned exceptionally uncertain in the most recent weeks".
"The most recent leading indicators point to a further slowing of activity in the third quarter of 2008. Although uncertainties are even higher regarding economic developments in 2009, growth in the euro area is expected to remain weak and clearly below potential."
Mr Almunia said policymakers should stand ready to recapitalise viable banks, adding that governments should be ready to swap assets of viable banks for treasury paper. He said governments should "expand considerably" their deposit insurance protection for individuals and "consider to guarantee" senior and subordinated guarantees of banks.
Mr Strauss-Khan said raising private capital will continue to be difficult in the short term, adding that the deleveraging process in financial markets was likely to be long and arduous and would impose downward pressure on credit creation and activity.
In advanced economies, the committee said, policies need to provide "essential stimulus in the face of the risk of a pronounced economic downturn".
Mr Strauss-Kahn said the global economy was likely to start its recovery in the second half of 2009, but added that the level of uncertainty was exceptionally large and there were big downside risks to that analysis.
