MercoPress. South Atlantic News Agency

IMF chief tells developing countries to prepare for three possible storms

The three threats according to Lagarde: banking contagion, fall in trade and reduced foreign investment

IMF Managing director Christine Lagarde urged on Monday developing countries to shore up their defences, especially foreign exchange reserves, against a possible European recession next year.

Lagarde was speaking during a visit to Nigeria in which she met President Goodluck Jonathan and Finance Minister Ngosi Okonjo-Iwaela and praised their planned economic reforms.

European finance ministers were discussing ways of boosting IMF resources to build a better firewall against the debt crisis on Monday, while also assessing plans for tighter Euro zone fiscal rules that they hope will prevent the problems from worsening.

But measures agreed in a summit on Dec. 9 have failed to calm markets, and on Friday ratings agency Fitch said a 'comprehensive solution' to the crisis was beyond reach, warning that six Euro zone economies, including Italy and Spain, could face credit downgrades.

“What we are saying to all developing economies is beware of what is happening in advanced economies at the moment. Beware of the clouds that are accumulating in European skies,” Lagarde said.

”Make sure that you have enough reserves, enough resistance, enough cushion to actually weather the storm ... as you did extremely well back in 2008, 2009 when you had reserves and you were able to sustain (yourselves during) the crisis,“ she added.

Lagarde said there were three ways in which developing countries were likely to be hit by the crisis -- financial contagion in the banking sector, a fall in trade as countries import less and a reduction in direct foreign investment.

”What we see is stalled growth in advance economies with potential recession in some of the European Union countries, including my own country (France), of course, and channels of contagion, which can be different,“ she said.

”They could be financial channels, because the banking system of European countries has scattered all over the map.“ She added that a fall in commodity prices was real risk to developing economies.

”It's going to be a matter of time before the price of commodities begins to possibly reduce,” she said.