IMF: New subprime losses main risk to world growth

World economic growth could miss the International Monetary Fund’s (IMF) forecast of 4,1% this year if United States and European banks disclose more major losses on the subprime market, the head of the IMF said on Monday.

Dominique Strauss-Kahn, starting a three-nation African tour in Burkina Faso, warned that emerging economies would not escape the effects of the slowdown in rich countries, although they would continue to grow quickly in 2008.

The IMF cut its 2008 global growth projection to 4,1% last month from a previous forecast of 4,4%, blaming the weak outlook in the US and Europe.

“Are there some downside risks? Yes, of course. Mainly, we don’t know exactly today if the whole disclosure on the subprime crisis has been done,” Strauss-Kahn said in an interview in Burkina Faso’s capital, Ouagadougou.

“It looks as if in the United States, a lot has been disclosed ... Many experts say that in Europe some disclosure has still to come, so it’s very difficult to know.”

Banks in the US and Europe have already unveiled multibillion-dollar losses from defaults on loans to home owners with bad credit histories, as Western property markets have cooled and fears of a US recession have grown.

Strauss-Kahn, a former French Socialist finance minister, cited concerns over the health of so-called “monoline insurers”, specialised insurers that are facing billions of dollars in loses from risky US subprime bonds.

US banks and regulators scrambled on Monday to put together a rescue package to bolster monoline bond insurer Ambac, while Goldman Sachs forecast write-downs of between $1-billion and $12-billion each for several large US brokers.

“If there is some new climax in the crisis ...
we will probably have bad news” on growth, he said. “If there is no more disclosure, if no more losses appear, then probably the forecasts are accurate. There even may be good surprises.”

Last year, global economic output grew by 4,9 % and Strauss-Kahn emphasised that it remained robust despite record oil prices and a spike in food costs around the globe.

“If there are no unknowns, then we can reasonably expect that the end of 2008 will be better and then the [world] economy will pick up again after the beginning of 2009,” he said.

‘No decoupling’

Strauss-Kahn, who took over at the multilateral lender in November, forecast a “small decrease” in international oil prices.

“The forecast we have ... is for oil not to go over $100 a barrel [on average] for 2008,” he said.

After holding talks with West African heads of state on the region’s economic outlook, Strauss-Kahn dismissed market speculation that fast-growing emerging market economies had “decoupled” from developed nations hit by the credit crisis.

“There is no decoupling, maybe some delay between the downturn of the developed economy and the impact on the developing economy,” he said. “On the other hand, growth will remain at a high level in emerging economies even if they lose one point of growth.”

China’s economic growth would slow slightly to 10% this year, with India’s output expanding by 8,5%.

“Last year, the share of the emerging economies was about three-quarters of the average growth for the world. It may be even bigger this year,” he said.

High food prices from Africa to Europe were posing a “real problem” in terms of inflation, Strauss-Kahn said. He urged developing nations to press ahead with industrialisation to improve their purchasing power in order to cope with this.—Reuters

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