The world economy managed to shake off several bouts of severe financial stress in recent decades, but the latest turmoil could prove harder to put behind, the International Monetary Fund warned today.
To get some sense of what to expect, the IMF reviewed the 1987 stock market crash, the Russian debt default and problems of Long-Term Capital Management, the collapse of the technology stock bubble and the attacks of September 11th in the latest edition of its semi-annual World Economic Outlook.
On the face of it, the IMF said the impact of the recent problems ought not be too severe. It said the latest market volatility was not unusually large and noted that past episodes of stress had not always led to slower economic growth.
"However, there are at least three reasons why the macroeconomic implications may yet be larger than what these earlier experiences suggest," it said.
The recent turmoil was triggered by a slowdown in the US housing market, with rising defaults on US subprime mortgages sparking wider fears of credit party risk that led to a worldwide credit crunch.
In the first place, the credit crunch could feed back into US housing, making conditions even worse in a step toward a viciously reinforcing downward spiral for growth, the IMF said.
Second, the knock dealt to confidence in structured financial credits could lead to a major retrenchment from securitization. This could hamper banks' ability to lend if these credits had to be brought back onto bank balance sheets.
Third, losses from the financial turmoil could put additional strain on the same banks' balance sheets, in the United States and elsewhere, "which could further exacerbate constraints on the availability of credit," the IMF warned.