/ 15 May 2008

IMF chief says worst of financial crisis is over

The worst of the financial-sector crisis is over, although the impact on the broader economy will likely drag on in coming months, International Monetary Fund (IMF) managing director Dominique Strauss-Kahn said on Thursday.

“There are good reasons to believe that the largest part of disclosure in financial institutions has been done, especially in the United States … so that the worst news is behind us,” he told a panel at the European Parliament.

“The main problem is the linkages between the financial crisis and the real economy and this is not behind us,” he added, estimating the impact of the financial turmoil to weigh on economic activity for another “several quarters”.

Economic growth has lost pace in most major economies recently in the wake of a slump in the US housing market, which has triggered extreme financial market volatility and reluctance among banks to make all but the safest loans.

After months of nerve-racking swings in financial markets, optimism has begun to emerge among market participants that the worst of the storm has blown over since the collapse of US investment bank Bear Stearns in mid-March.

While past financial crises tended to be triggered by problems in developing countries, often with current-account problems, Strauss-Kahn warned that in the long term the recent turmoil would likely be “a taste of the new kind of crisis that we are going to face”.

With big developed economies such as the US and Europe slowing following the turmoil, Strauss-Kahn said that emerging countries would be the biggest motors behind world economic growth this year.

Nevertheless, he insisted that such fast-growing economies would also eventually feel the impact of the slowdown in rich countries, although perhaps with “some delay”.

“In no way is there some sort decoupling” between economic growth trends in developed countries and emerging economies, he said, weighing into one of the hottest debates currently in economics. — AFP