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Piecemeal approach won't solve finance crisis, says IMF

Source: PTI
October 08, 2008 14:25 IST
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Hitting out at 'piecemeal' interventions to resolve the global financial crisis, the International Monetary Fund has warned that these steps have failed to restore market confidence and decisive policy measures would be required to bring back faith in the financial system.

The IMF stated this in its Global Financial Stability Report, which was released ahead of the annual meetings of the World Bank and the International Monetary Fund.

Meanwhile, India's Finance Minister P Chidambaram will be in the town from October 10 for the start of the annual meetings that will include not only major bilaterals with his counterparts but also his presentations at the International Monetary and Finance Committee and the Development Committee over the weekend.

Chidambaram will also be making a presentation at the Plenary on October 13.

Referring to the global financial crisis in its report, the IMF also expected that it (the crisis) will further slow down the world economic growth rate and major global banks alone require some $ 675 billion over the next few years to keep private sector credit growing even modestly.

The IMF has said, 'With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system. Failure to do so could usher in a period in which the ongoing de-leveraging process becomes increasingly disorderly and costly for the real economy.'

The international multilateral institution has stressed that piecemeal interventions to address the attendant liquidity strains and resolve the troubled institutions did not succeed in restoring market confidence, as they have not addressed the widespread nature of the underlying problems.

Despite the US government clearing a $ 700 billion bailout package for the battered financial institutions, the markets were witnessing bloodbath worldwide with the benchmark Dow Industrial Average Index falling below 10,000 level on October 6 for the first time in four years.

'...confidence in global financial institutions and markets has been badly shaken,' the International Monetary Fund said.

The report said restoration of financial stability would now require a publicly-stated collective commitment by the authorities of the affected countries to address the issue in a consistent and coherent manner, while avoiding adverse effects on other countries.

With many financial institutions finding it much more difficult to raise private capital at the present time, the authorities may need to inject capital into viable institutions.

'To keep private sector credit growing, even modestly... the GFSR estimates some 675 billion dollars in capital would be needed by the global major banks over the next several years,' IMF said.

While there are many ways to accomplish this, it is preferable that the scheme provides some upside for the taxpayer, coupled with incentives for existing and new private shareholders to provide new capital, it said.

'Though politically difficult, orderly resolution of non-viable banks would demonstrate a commitment to a competitive and well-capitalised banking system,' according to the IMF.

'Countries whose banks have large exposures to securities or problem assets could consider mechanisms for the government to purchase or provide long-term funding for such assets. This should create greater certainty about balance sheet health. Setting up an asset management company provides a framework of legal clarity and accountability for the process,' the report said.

Financial institutions that rely on wholesale funding, especially in cross-border markets, have faced severe and mounting refinance risks. Central banks, therefore, are exploring more ways to extend term financing to meet funding needs of institutions.

'The measures described above to boost capital and underpin asset valuations, as well as those already undertaken to provide liquidity, should provide essential support for the markets to function properly and confidence to be re-established. Continued progress on reducing counterparty risks, including centralised clearing and settlement arrangements, will also help,' the IMF said.

The October 2008 World Economic Outlook notes that the strains afflicting the global financial system are expected to deepen the downturn in global growth and restrain the recovery.

'Moreover, the risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat,' the GFSR has said, in a peek at what the future beholds both for the developed and the developing economies.
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