Credit crunch to slow, not stop, growth: IMF

The IMF continues to forecast solid global growth with mostly limited inflation pressures.

By GREG ROBB, MARKETWATCH
September 25, 2007 09:05
2 minute read.

 
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MarketWatch: In-depth global business coverage The financial markets' turmoil and the credit crunch will likely slow the global economic expansion but won't be sufficient to bring it to a halt, the International Monetary Fund said in a report released Monday. The IMF continues to forecast solid global growth with mostly limited inflation pressures. The report expressed cautious optimism that the biggest financial institutions would be able to weather the storm in financial markets. "Systemically important financial institutions began this episode with more than adequate capital to absorb the likely level of credit losses. Corporations have, for the most part, been able to secure the financing they need to maintain their operations," the report said. But the credit crunch definitely has not run its course, the report indicated. "The period ahead may be difficult, as bouts of turbulence are likely to recur and the adjustment process will take some time. Uncertainty about the final size of losses, and when and where they will be revealed, will likely continue to keep market sentiment and conditions unsettled in the near term," the IMF said. It also said the chances of a more severe tightening of credit conditions could not be dismissed. The global credit crunch began in the market for subprime mortgages, but, because these mortgages were packaged and widely sold as derivatives, losses have spread throughout the financial sector. The IMF said loss estimates remain highly uncertain. "Financial intermediaries active in the mortgage market have complex webs of exposure, but the largest such institutions - the core commercial and investment banking groups - are viewed by IMF staff and private-sector analysts as sufficiently capitalized, diversified, and profitable to absorb direct losses," the report said. All the same, a number of banks will incur losses. "The negative impact is expected to be manageable for the industry as a whole," the IMF said, adding: "Smaller, less diversified institutions are viewed as more vulnerable." In particular, some banks may be vulnerable due to short-term illiquidity in the commercial paper market, the report said. The IMF said that government policy-makers have many challenges ahead to understand the new global credit markets and "need to better detect and understand how risks develop within the modern financial system." But the IMF cautioned that regulators should seek to "strike a balance" between protecting consumers and facilitating innovation. In addition, the IMF's report called for greater transparency in the links between on- and off-balance-sheet entities. The IMF called for credit-rating agencies to come up with a better rating scale for derivatives "to highlight to investors that they should expect a higher speed of migration between ratings than on a traditional corporate bond." At the same time, institutional investors should not rely too much on the agencies' letter ratings. But the report concluded that "there is still much to learn, since events are still unfolding." The agency is scheduled to provide an update to the report on October 16. MarketWatch: In-depth global business coverage

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