The International Monetary Fund (IMF) warned on Tuesday that official economic recovery efforts were floundering, undercut by blighted bank balances, as Barack Obama prepared to sign a huge new spending plan to salvage the United States economy.
With financial turmoil worsening, Japan’s capacity to spark a turnaround suffered a major hit with the resignation of Finance Minister Shoichi Nakagawa, who appeared to be drunk in public at a weekend meeting in Rome of the Group of Seven ministers.
Nakagawa, who blamed his appearance on cold medicine and denied having been drunk, was replaced on Tuesday by Economics Minister Kaoru Yosano, whose unenviable job it will be to grapple with Japan’s most acute economic crisis in more than half a century.
Market watchers said the political storm had raised concerns about whether the government would be able to take decisive action to tackle the country’s deepening recession.
“His resignation undermines Japan’s international credibility, which is already viewed negatively by investors due to bad economic data and the unpopularity of Prime Minister Taro Aso’s government,” said Daisuke Uno, chief market strategist at Sumitomo Mitsui Banking Corp.
The resignation of another embattled finance minister, Viktor Pynzenyk of Ukraine, was meanwhile accepted on Tuesday by the Ukrainian Parliament, raising fears about the fate of an IMF loan for the country.
The head of the IMF, Dominique Strauss-Kahn, told a France Inter radio interviewer that the global financial system was still far from sound and that toxic bank debt was undermining government recovery initiatives.
“The whole world’s financial system is not yet healthy and thus recovery effects are not sufficiently strong,” he said.
“We must finish the job of cleansing bank balance sheets,” he insisted, complaining that some banks and national regulators were not working quickly enough to identify and isolate the bad credit that provoked the collapse.
“I’m worried, because the plans that are being put in place are headed in the right direction but don’t go far enough,” he argued, calling for more coordination between governments struggling with national recovery plans.
Some countries have partly or wholly nationalised banks hit by the credit crisis, others have pushed through rapid mergers and some experts have said so-called “bad banks” must be established to absorb toxic debt.
Many commentators fear, however, that billions of dollars in unpayable loans are still lurking on institutions’ books, disguised in a thicket of complex financial instruments and undermining trust in the credit market.
Meanwhile, The Netherlands became the latest European country to reveal the sting in the tail of recession. An official body forecast that the economy would shrink by 3,5% this year and Prime Minister Jan Peter Balkenende said the country was in “heavy recession”.
The recovery stakes are widely seen as being highest in the US, the engine of the world economy, where later on Tuesday President Obama was to sign a $787-billion stimulus Bill, a combination of public works spending and tax breaks aimed at boosting the recession-strapped US economy.
But the Obama administration is also up against the reluctance of US banks to lend to businesses and consumers and has put forward a controversial and still-vague scheme to relieve banks of the their bad debts.
The president must also contend with another major challenge — the fate of the devastated “Big Three” car firms.
General Motors and Chrysler must report to the Treasury on Tuesday on their restructuring plans, a condition for a $17,4-billion car industry bailout funded by taxpayers. — AFP