MercoPress. South Atlantic News Agency

IMF: turbulences will impact growth, “but not dramatically”

IMF Rato optimistic about the world economy

Turbulences affecting world markets which will be around for some time will have an effect on global economic growth because of the uncertainty it has created, said IMF Managing Director Rodrigo Rato in Sao Paulo.

"It shouldn't be surprising that it has a certain effect on growth, more intense in certain countries than in others", said Rato who admitted that the global growth rate forecast for this year of 5% will have to be reviewed down, "but not dramatically". "In any case it will be the sixth year running of growth in the world and with corrections that in some countries will be minimal", he underlined. Rato went further and said that "the world economy overall is in good track, in spite of the financial markets perturbations. Fundamentals both in the industrialized countries and in most of emerging economies are still good". But Mr. Rato was not the only IMF official to show optimism: in an interview with The Financial Times, John Lipsky said emerging markets had so far withstood the challenge, but it would be "far too optimistic to assume there will be no impact". Lipsky, first deputy managing director, said that in addition to the possible spillover effects on trade of weaker growth in the US, other economies would be directly affected. "I would expect it to have some impact . . . in a globalized world," he said. "A number of the financial institutions that have been affected most strikingly have not been US-based." Lipsky said that it remained unclear how large the impact of the market turmoil would be. "Whether the dampening is substantial or moderate, whether it is temporary or more extended remains to be seen." The world economy, he said, had entered this market turbulence in good shape, with strong growth momentum, a large part of which came from emerging market economies, but warned there would be no quick end to the turmoil because of uncertainty as to how much damage it would do to growth. The top IMF official described what he called the three main components of the markets crisis: first, a re-pricing of credit risk; second, a testing of the newer parts of the asset-backed securities market – in particular collateralized debt obligations and collateralized loan obligations (derivatives backed by pools of credits) that have not yet been tested under strain; third, increased fear of counterparty risk, caused by inadequate transparency on the part of banks as to the extent of their true contingent liabilities. "Lack of transparency can create doubts that translate into market volatility," he said. "We are finding that in some cases regulated financial institutions are carrying off-balance-sheet risks that have indirect implications for those institutions." This had caused uncertainty about what risks a counterparty institution might be bearing and, in turn, contributed to the drying up of liquidity in parts of the markets. "Lessons would be learned and actions taken" by ¬global regulators he said. Finally Lipsky argued that the one big difference between the current episode and the financial crisis in 1998 was that, in 1998, the risk transfer mechanisms that came under strain had been designed to transfer interest-rate risk, whereas the mechanisms being tested now were designed to transfer credit risk. He avoided the controversy regarding the responsibility of whether credit rating agencies had done their job well. However, "the basic issue is that, in the end, professional investors bear the ultimate responsibility for risk assessment and management in a securitized market. It is not realistic to expect third parties to take that responsibility."