MercoPress. South Atlantic News Agency

IMF Rato warns Latam about impacts of US sub prime crisis

The credit squeeze will force governments worldwide to make substantial changes to their budget plans, Rodrigo Rato, outgoing managing director of the International Monetary Fund, has warned. He said that the credit squeeze was a “serious crisis” that was not over yet and would curtail growth worldwide.

Talking with the Financial Times Rato pointed out that "policymakers should not think that the problems will stay at the desk of the bankers. Problems are going to come to the real sector, come to the budgets – that is something we keep telling people". Rato appeared to endorse European concerns about the decline in the dollar; a subject that threatens to be a cause of discord at the Group of Seven summit and IMF annual meeting this month. He said the US dollar was "undervalued" on many measures and warned about excess volatility in currency markets. "What we would like to see is not sudden changes," he said. The credit crisis was "not a storm in a teacup". Rato said that "independently from the value of the US dollar", it is in the interest of China to adopt a more flexible exchange rate to better manage its economy given its close links with the US currency. "Arguments in favor of this policy are becoming increasingly strong". While the crisis may not continue to rage with the same intensity as before, it would take "a few months, probably into next year" before liquidity, availability of credit and risk spreads would return to more normal levels, he said. Mr Rato said the market crisis "is going to have an impact on growth" and that this will force finance ministers to revise their budget assumptions. But he admitted many appear reluctant to do so, he added. Since the credit crisis originated in the financial markets of the "most sophisticated" economies, its impact would be felt "more quickly" in the US and to some extent in Europe and Japan rather than in the rest of the world, Mr Rato argued. "The US is going to slow down," he said. "Growth in Europe looks less strong than before, and in Japan too – though Japan will probably stay [at about] potential." But he cautioned against assuming the developing world could decouple completely from the US. "Everybody is going to feel some impact," he said. The outgoing IMF chief said many of the big emerging markets are growing rapidly. But also mentioned that "to what extent they will keep that momentum will depend on how long the slowdown is in the US and Europe". Mr Rato said emerging markets with large current account deficits would be much more vulnerable to changes in the availability and price of credit than those in a "more balanced situation". Speaking in Madrid before a forum of Ibero American Chambers of Commerce Rato reiterated the concepts of his interview insisting the current financial crisis risks "are clearly more important than six months ago" and no one can wait in Latinamerica for events to happen "with arms crossed". He anticipated that the effects of the US mortgage crisis have a limited impact this year but in 2008, "we will receive the full impact with lower world growth" with problems overflowing to the real economy. "Latinamerican countries so far have been unharmed by the US sub prime crisis but they can't cross arms, and what are needed is "more fiscal flexibility" and social policies to help combat poverty avoiding "strong increases" in government spending.