MercoPress. South Atlantic News Agency

IMF head forecasts global economy recovery at end of 2009

International Monetary Fund, Dominique Strauss-Khan

The turnaround in the global economic slowdown could come in October or November this year, but an economic recovery depends on many factors and isn't likely to start for another year, the head of the International Monetary Fund, Dominique Strauss-Khan, warned Friday.

Speaking at a press conference in Vienna, Strauss-Khan said “the worst of the economic crisis is probably behind us, ”as international institutions and central banks now have a clear picture of the risks to the economy”.

But he also said there is “a lot of still existing risk to the economy”, and warned that a prerequisite of a global economic recovery is that all balance sheets are cleaned up in the financial sector.

“Without clean balance sheets, an economic recovery won't be possible,” Strauss-Kahn said.

Strauss-Khan also took the opportunity to apologize for mistakes in IMF calculations on the financing needs of some eastern European countries.

“We made an error, which is a human error, which shouldn’t happen but may happen. This is a mistake which is as big as 1% of GDP at average, which is not negligible. So, it has been fixed now. We now how this mistake has been done, it’s a misunderstanding of a concept in some parts of the institutions.”

He also underlined there is an urgent need for co-operation in macroeconomic and financial policy making for better and more efficient achievement in the prevailing crisis management.

“When this crisis broke, countries were not initially inclined to coordinate policies. Initial policies tended to be reactive, responding to the needs of particular institutions as they arose”.

”Countries acted in an uncoordinated manner to expand lender of last resort facilities, increase protection of creditors and depositors, and recapitalize banks with public funds. The lack of coordination had some destabilizing effects, at least in the short term”, said Strauss-Khan.

“I want to stress the importance of a coordinated approach to crisis management in macroeconomic and financial sector policy making. I think countries have made great progress in taking a common approach to monetary and fiscal policy, as they search for solutions to this global crisis, but less so in financial sector regulation and supervision,” he said.

The IMF managing director also pointed out to the lessons of monetary policy , and that countries also need to dip into their fiscal policy arsenal. “As you know, the IMF has been out in front calling - as early as January 2008 - for a discretionary fiscal loosening for countries that can afford it”.

“We made this recommendation because our forecasts suggested an exceptionally large and long-lasting decline in demand. We saw it as especially important to avoid the risks of deflation, which would wreak havoc on the economy by raising the debt burden and further impairing the financial sector,” Strauss-Kahn said.

“Fiscal stimulus is less effective in more open economies, as some of the spending feeds through to imports, benefiting output and employment in other countries. This is why collective action is so important, why countries must act in unison. If more countries act, the burden on each individual country is lessened,” he said.

The IMF boss listed four major areas where coordination was highly necessary from countries. “There are four essential areas: coordination of regulations, coordination of resolution tools, coordination in depositor and investor protection, and enhanced information sharing,” he stated.