'Ten days to rescue euro' as leaders call for IMF funds

Europe faces a crucial ten days to save the eurozone, a leading EU monetary chief warned after finance ministers from the currency bloc admitted they may need IMF help to increase the firepower of their bailout fund.

Economic and Monetary Affairs Commissioner Olli Rehn said the EU had little time to conclude its crisis response. 

By Martin Strydom

10:45AM GMT 30 Nov 2011

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday as EU finance ministers met in Brussels.

His comments came as Gerard Lyons, chief economist at Standard Chartered, said: "The euro cannot survive in its present format."

"Throughout the year I have stressed that the world economy could suffer a double-dip if it was hit by one of three factors: an external shock, a policy mistake or a loss of confidence. Unfortunately, in recent months, the euro area has been hit by all three. And that is why the euro area will slip back into recession in 2012," he said in his Economic Outlook for November.

He warned that the scale of the downturn will be determined by eurozone leaders' policy actions and the extent to which confidence is hit.

Confidence in Europe remained low in financial markets on Wednesday on disappointed at attempts to increase the firepower of the eurzone bailout fund.

RELATED ARTICLES

• Schauble admits bail-out fund won't halt crisis 
  30 Nov 2011
• Eurozone to explore ways to boost IMF bailout fund firepower 
  30 Nov 2011
• Eurozone approves extension of EFSF: statement in full 
  30 Nov 2011
• Chancellor dreams up income 
  30 Nov 2011
• Debt crisis: live 
  30 Nov 2011

Italian and Spanish borrowing costs continued to rise and stock markets fell after Wolfgang Schauble, Germany's finance minister, said Europe's "big bazooka" rescue fund is not ready and won't stem the region's debt crisis.

Eurozone finance ministers, who were meeting ahead of the Ecofin summit today, acknowledged the €440bn (£376bn) fund would not win support to leverage it up to €1 trillion. Its capacity would be between €500bn and €700bn instead – a total that is unlikely to be big enough to rescue Spain and Italy.

"The situation in Europe and the world has significantly worsened over the past few weeks. Market stress has intensified," said Christian Noyer, France's central bank governor and a governing council member of the European Central Bank.

On Wednesday, Swedish finance minister Anders Borg renewed pressure on the European Central Bank to help halt the debt crisis.

"We need to keep all options on the table, to my mind price stability is secured in Europe - therefore there is some room also for the central bank to maneouvre on this issue," Mr Borg said as the 27 EU ministers gathered to pick up the thread of overnight eurozone ministerial talks.

He also said IMF contributors had to raise their input.

Belgium's Didier Reynders said finding a solution that would deliver a big enough pot of money to deal with debts that easily dwarf existing bailouts for Greece, Ireland and Portugal would need "the (European) central bank as well as the IMF".

The call for a bigger role for the ECB will lead to a clash with Germany which opposes such a move and last week got France and Italy to agree to stop pressuring the central bank to help.

Christine Lagarde, the head of the IMF, warned in September that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.

Members of the IMF have agreed to increase the fund's resources but a senior G20 official in Asia told Reuters on Wednesday that no progress had been made so far.

The United States has insisted that the European Union has enough resources to stem the crisis without outside help.

http://www.telegraph.co.uk/finance/financialcrisis/8925250/Ten-days-to-rescue-euro-as-leaders-call-for-IMF-funds.html

IMF warns of acute debt challenges for West

The International Monetary Fund has warned that advanced economies such as the UK and US are facing an 'acute' challenge in reducing debt loads following the financial crisis which could in turn hamper economic growth.

By James Quinn, US Business Editor
Published: 8:40PM GMT 22 Mar 2010

John Lipsky believes that high levels of governmetn debt could slow growth Photo: Bloomberg

The International Monetary Fund has warned that advanced economies such as the UK and US are facing an 'acute' challenge in reducing debt loads following the financial crisis, a problem which could in turn hamper economic growth.

John Lipsky, the IMF's first deputy managing director, said that high levels of government debt and fiscal deficits have already led to increased risks for a number of countries.

Mr Lipsky cautioned that such problems could slow economic growth over the medium-term and trigger higher interest rates.

"Maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually compared with pre-crisis performance," he said in a speech in Beijing.

He went on to say that for "most advanced economies' " fiscal consolidation should begin in earnest in 2011, and gave warning that simply unravelling stimulus programmes would not be enough.

Mr Lipsky cited evidence that all G7 countries except Germany and Canada will have debt-to-GDP ratios close to or in excess of 100pc by 2014.

"This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up," he continued.

In a separate speech in Hanoi, Mr Lipsky said the global economy will rebound by 4pc in 2010 and 4.25pc in 2011.

However, what the IMF terms the "emerging Asia" region – including China and India - will grow at more than twice the pace, with an economic growth rate of 8.25pc estimated in the current year.


http://www.telegraph.co.uk/finance/economics/7500211/IMF-warns-of-acute-debt-challenges-for-West.html

Chief of I.M.F. Urges Continued Stimulus Efforts

Chief of I.M.F. Urges Continued Stimulus Efforts

By MATTHEW SALTMARSH
Published: November 24, 2009

PARIS — The chief of the International Monetary Fund urged the world’s major economies on Tuesday to retain their economic stimulus programs until there were durable signs of a recovery, including an end to rising unemployment.

Dominique Strauss-Kahn, head of the International Monetary Fund, on Monday. He urged the world’s advanced nations to continue with their stimulus programs until they return to a solid economic footing.

“A premature exit is the main danger,” Dominique Strauss-Kahn, managing director of the I.M.F, said during an interview at the fund’s office here. “We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon.”

Mr. Strauss-Kahn, who was visiting Europe this week, added that “the bigger risk is of growth not coming back, a jobless recovery and to believe that we are out of the woods.”

The comments place the I.M.F. firmly on the side of the major Western governments, the primary backers of the fund, in calling for retention of state support like aid for banks and automakers and tax breaks for consumers.

The I.M.F.’s position contrasts starkly with the prescription it gave to Asian countries grappling with a different economic crisis a decade ago.

Then, the fund, which is based in Washington, lent money to countries including South Korea, Indonesia and Thailand. But it linked its support to harsh financial medicine like high interest rates and a restrictive fiscal policy aimed at balancing budgets. The conditions were blamed for prolonging the downturn in the region.

The I.M.F. has “learned a lot from the Asian crisis — that one-size-fits-all doesn’t work and that you have to adapt to the constraints of the country,” Mr. Strauss-Kahn said.

In the current context, continuing the stimulus entails risks, according to some economists and politicians, like impoverishing future taxpayers, creating excessive reliance on foreign creditors, keeping unproductive banks afloat and even stoking inflation.

Some economists are worried that the splurge in government spending could push the public finances of some countries close to the brink. Rising deficits have caused strains in bond markets, reflecting worries about the possibility of default and the ability of investors to digest the surge in supply.

In Europe, borrowers like Ireland and Greece have come under particular strain. There has been speculation that the government in Britain — where the budget deficit is projected to rise above 13 percent of gross domestic product next year — may face more severe balance of payments difficulties.

A recent report by Variant Perception, a research firm based in Charlotte, N.C., said the British fiscal situation was “already on a par with some of the worst financial crises in the postwar period that have precipitated currency crises.”

Mr. Strauss-Kahn acknowledged the dangers. “I understand the concerns about deficits and they are not unfounded,” he said. “Defaults, of course, are a concern, but they are not likely.”

He stressed that in the event of extreme strains in government bond markets, systemically important borrowers would find support either from multilateral lenders or central banks.

He also acknowledged concerns about commercial banks becoming too dependent on ultracheap financing from the major central banks.

Over all, he said, the fund was more confident about the global outlook than it was in September, when it last released economic projections. This suggests that, excluding a dip in activity in December, it would raise its key forecasts in the update in January. “The U.S. recovery appears to be stronger than we thought in September,” he said. “What I see in the global figures now is that things are moving faster than expected.”

Regarding currency adjustments, Mr. Strauss-Kahn said that the euro appeared “somewhat overvalued,” while the renminbi was “still undervalued.” A rise in the value of the Chinese currency would be a logical element in the country’s “shift from an export-driven economy to one that was more dependent on domestic demand,” he said.

The I.M.F. has been asked by the Group of 20 to study ways to allow banks to pay for their own bailouts. It is expected to report on the matter in April. One option it will examine is a tax on financial transactions.

Meanwhile, the announcement last week by Hungary that it would forgo the next installment of an I.M.F. loan was “the best news of the year,” Mr. Strauss-Kahn said. Other countries in the region — like Ukraine, Latvia, Romania and Serbia — still face “challenges,” he said.

After the crisis, the I.M.F. will continue to offer technical advice and training as well as taking “a more formal role linked to the G-20 as a kind of think tank and institution to help implement the follow-up to G-20 meetings,” he said. Further out, it may even become a lender of last resort.

http://www.nytimes.com/2009/11/25/business/global/25imf.html?ref=economy

I.M.F. Puts Bank Losses From Global Financial Crisis at $4.1 Trillion

I.M.F. Puts Bank Losses From Global Financial Crisis at $4.1 Trillion

By MARK LANDLER
Published: April 21, 2009
WASHINGTON — As finance ministers gather here this weekend for meetings of the International Monetary Fund and the World Bank, they will focus on two eye-popping numbers: $4.1 trillion, the fund’s latest projected losses from the global economic crisis, and $1.1 trillion to help fix it.
The huge numbers illustrate the depth of the worldwide economic upheaval and the challenge facing those institutions, which are increasingly at the heart of efforts to contain the damage.
In a report released Tuesday, the I.M.F. estimated that banks and other financial institutions faced aggregate losses of $4.05 trillion in the value of their holdings as a result of the crisis.
Of that amount, $2.7 trillion is from loans and assets originating in the United States, the fund said. That estimate is up from $2.2 trillion in the fund’s interim report in January, and $1.4 trillion last October.
The fund said that it spotted the first glimmers of stabilization in the global financial system, but that “continued decisive and effective action” by governments, banks and institutions like the I.M.F. would be needed to prevent the system from going into a downward spiral.
At a meeting of industrial and developing countries in London this month, President Obama and other leaders pledged $1.1 trillion more for the fund and, to a lesser extent, the World Bank.
Now, the I.M.F. must figure out how to turn those pledges into hard cash — no easy task, insiders and outside experts say — and how to marshal the money to steady teetering economies including those of Iceland and Pakistan.
“We’d be deluding ourselves if we think it is going to solve the crisis,” said Desmond Lachman, an expert on the fund at the American Enterprise Institute in Washington. He was speaking at a conference organized by the institute titled “Can the I.M.F. Really Save the World?”
The answer, most participants agreed, was no, but its vastly increased resources have turned the fund into a crucial player.
“Anytime you raise expectations, it’s important that you deliver,” said Robert B. Zoellick, the president of the World Bank. “Part of this week’s meetings will be about how you deliver.”
Analysts said the $1.1 trillion sum assumed huge contributions by the United States, China and other countries, which may or may not come through. It also counts some contributions more than once, and it counts some in the form of a synthetic I.M.F. currency that is not hard cash.
Using funds on hand, the World Bank said it would triple its investments in social safety-net programs to $12 billion over the next two years. The goal, Mr. Zoellick said, is to protect the most vulnerable people in developing countries from facing poverty, hunger or disease because of the crisis. “It’s vital that we make this more than a discussion of high finance,” he told reporters on Tuesday.
The reality is that the Washington meetings will be dominated by talk about the escalating losses weighing on the world’s leading banks, insurance companies and pension funds. The fund’s report said the recession was magnifying the impact of the credit squeeze on them.
“Shrinking economic activity has put further pressure on banks’ balance sheets as asset values continue to degrade, threatening their capital adequacy and further discouraging fresh lending,” the fund said in its report, released twice a year, which has become a barometer of the severity of the crisis.
As banks struggle to cleanse their balance sheets, the fund said, capital flows to emerging-market economies have plummeted, throwing Eastern Europe into crisis. That threatens to spill over to Western Europe, because its banks are major lenders to Hungary, Estonia and other countries.
Among European countries, the fund has already agreed to more than $55 billion in loans to Hungary, Serbia, Romania, Iceland, Ukraine, Belarus and Latvia. More may yet need to be bailed out.
On Tuesday, Colombia became the second Latin American country to seek aid, requesting $10.4 billion. Last Friday, the fund approved a $47 billion line of credit for Mexico, making it the first country to qualify for a loan from a program that extends credit to emerging economies that are considered well managed. Poland also said this week that it would seek a $20.5 billion credit line under that program.
With so many loans flowing out the door, experts said, the fund would run out of money without the infusion.
“They really need to nail down this financing, especially from emerging markets,” said Eswar S. Prasad, a professor of trade policy at Cornell University and a former head of the China division at the I.M.F.
In a twist that leaves some experts shaking their heads, the fund needs money from cash-rich developing countries, like China and India, to help more developed but strapped countries, like those in Eastern Europe.
Western Europe looms as the next front in the crisis, according to the fund’s report. It estimates that financial institutions will have to write down $1.19 trillion in loans and securities originating there. And they have gotten off to a much slower start than their American counterparts.
In the United States banks reported $510 billion in write-downs by the end of 2008, and they face an additional $550 billion in 2009 and 2010, the fund said. In the countries of the euro zone, banks reported just $154 billion in write-downs by the end of last year and still face $750 billion in projected write-downs, the fund said.
David Jolly contributed reporting from Paris.

http://www.nytimes.com/2009/04/22/business/global/22fund.html?em

Global downturn deeper that feared, says IMF

April 22, 2009

Global downturn deeper that feared, says IMF

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world

The savage slump in the world’s leading economies is set to be even deeper than previously feared, with recovery next year now unlikely to materialise, the International Monetary Fund warned today.

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world. It blamed the continuing blight from severe financial stresses for a still worsening global outlook.

For Britain, the fund inflicted a double blow on Alistair Darling minutes after the Chancellor unveiled his Budget. It predicted that the UK economy will now shrink by 4.1 per cent this year — markedly worse than Mr Darling’s own new projection for a 3.5 per cent decline, and said that the recession would drag on into 2010, with a further drop of 0.4 per cent in GDP next year. The Chancellor has predicted a recovery with 2010 growth of 1.25 per cent.

The fund’s hard-hitting report warned that, despite a blizzard of far-reaching official efforts to bail-out banks and stem financial turmoil, governments had failed to halt a vicious downward spiral as intense financial strains and deteriorating economic conditions feed off each other.

Calling for still more “forceful action” by governments on both sides of the Atlantic, the IMF said that halting the slump in the global economy and restoring growth now depended critically on governments “stepping up efforts to heal the financial sector”.

But a day after the fund predicted that cumulative losses for banks in the US, Europe and Japan from the credit crisis will hit $4 trillion, it also warned that, even if economic recovery is secured, it is set to be anaemic and “sluggish relative to past recoveries”.

The latest IMF forecasts, in its twice-yearly World Economic Outlook, project that what it says will be by far the worst world recession since the Second World War will mean a worldwide plunge in economic output (GDP) of 1.3 per cent. That compares with its January forecast which foresaw meagre world growth of just 0.5 per cent, still weak enough to be classed as a global recession.

In the leading economies of the West, the IMF now expects GDP to plummet this year by a vicious 3.8 per cent, down from the 2 per cent drop it expected in January.

It also now expects no revival in 2010, with the advanced industrial economies as a whole set to stagnate with zero growth. That contrasts with the recovery to 1.1 per cent growth that the fund was able to envisage only four months ago.

The bleak new assessment saw forecasts cut for every Western economy this year. The US economy, at the epicentre of the global financial firestorm, is forecast to shrink by 2.8 per cent this year and then to stagnate in 2010. The IMF has abandoned its hopes of a resurgence of American growth to 1.6 per cent next year, and cut its US forecast for this year by a further 1.2 percentage points.

In the eurozone, the report said that the plight of Europe’s big economies would also worsen, with the 16-nation bloc as a whole suffering a 4.2 per cent collapse in GDP this year, and set to shrink by another 0.4 per cent in 2010.

Germany is tipped to be worst hit with a GDP plunge of 5.6 per cent this year, and a further 1 per cent next year. Only France is predicted to see some imminent relief from the gloom, with as 3 per cent decline in 2009 forecast to be followed by modest 0.4 per cent growth after the new year.

The IMF said there were dangers that even its grim new assessment could be too rosy a view, if what it repeatedly called the “corrosive” downward spiral of financial and credit stresses aggravating economic woes was not arrested. “A key concern is that policies may be insufficient to arrest the negative feedback,” it said.

The fund attacked failures by governments to tackle the banking and credit crisis effectively enough. “Announcements have too often been short on detail and have failed to convince markets; cross-border coordination of initiatives has been lacking, resulting in undesirable spill-overs; and progress in alleviating uncertainty related to distressed [toxic] assets has been very limited.”

It renewed its warning a day before that an angry public backlash against banks, bankers and the financial industries could prevent governments from taking the decisive and extensive action needed to stem the threat.

Even once growth is eventually restored to the world’s key economies, the IMF added that the long-term damage from the recession and financial turmoil meant that “there will be a difficult transition period, with output growth appreciably below rates seen in the recent past”.

In a rare glimmer of hope, it conceded, however that: “Recent data provide some tentative indications that the rate of contraction [in the main economies] may now be starting to moderate.”

http://business.timesonline.co.uk/tol/business/article6147495.ece

IMF warns over parallels to Great Depression

IMF warns over parallels to Great Depression

The International Monetary Fund has warned of "worrisome parallels" between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:42PM BST 17 Apr 2009
Comments 8 Comment on this article


This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.

Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. "The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping," he said.

Related Articles
The global economy is at the point of maximum danger
Private equity collapse on cards, says IMF
Gold hits record against euro on fear of Zimbabwean-style response to bank crisis
Bank losses from credit crisis may run to $1,600bn, warns Bridgewater
Sharp rate rises could create risks for euro-zone, warns IMF

"The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today."

Mr Strauss-Kahn called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.
While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.

The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. "While the credit boom in the 1920s was largely spec­ific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact," it said.

The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. "The risks of debt deflation have increased," it said.

Abrupt halts in capital flows can have "dire consequences" for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6pc fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50pc of its GDP to Western banks.

Synchronised world recessions striking all major regions are "historically rare" events, the Fund said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.

http://www.telegraph.co.uk/finance/financetopics/recession/5166956/IMF-warns-over-parallels-to-Great-Depression.html

##In every crisis, there exists some opportunities. Be brave.

Could the IMF run out of money?

Bailing Out the Bailers
Could the IMF run out of money?
By Karim Bardeesy Posted Wednesday, October 29, 2008 - 6:21pm

Who’s your bailout daddy? Well, if you’re Ukraine, Iceland, Hungary, Belarus, and Pakistan right now, it’s the International Monetary Fund. New loan commitments made by the IMF in the last two weeks already exceed $30 billion; requests for billions more could be forthcoming. Which raises a troubling question: Could the IMF run out of cash?

Unlikely, but the IMF may have seen its financial heyday. It was created during the 1944 Bretton Woods conference to help manage the international monetary system and accumulated healthy reserves of currency after World War II. It continues to be funded by “quotas” charged to each member country largely based on the size of its economy. The quotas are a one-time charge, though. If the IMF needs more money, it has to go back to its member countries, and they’re in tough shape right now. The most powerful among them—the United States and the European Union—are shoveling money out the door to deal with their own problems, creating new debt to buy bank shares.

That said, right now the fund is flush and the balance sheet is strong. It now has the equivalent of $201 billion available to be lent out. (It calls this its “one-year forward commitment capacity.”) Before the meltdown, there was “only” around $18 billion in debt outstanding, half from Turkey and the remainder from poorer African, Caribbean, and Central Asian countries.

There’s gold, too. The IMF owns, at last reckoning, more than $9 billion worth of the stuff (but an 85 percent supermajority of its membership is required to sell or buy any of it). The IMF can also borrow more money from wealthy member countries, with up to $53 billion extra available through two supplementary agreements if need be. And flailing countries can turn elsewhere for financing; the United States gave cash and loan guarantees worth $20 billion directly to Mexico in 1995.

In emergency situations, when a country is having trouble paying back loans that are due imminently, a SWAT team will go to the supplicating country to figure out what policies and how much short-term financing are needed. The IMF doesn’t quite carry the Domino’s half-hour guarantee, but it claims to be able to have a decision back to you in as little as 48 hours after its board receives a report on the situation. Only the hardiest currencies, like yen and U.S. dollars, are lent out (although a few Botswanan pulas might be out on offer).

The aid doesn’t come for free. There are loan repayments—the IMF actually takes a cut on every deal, lending out to needy countries at a higher interest rate than it pays back to “donor” countries. Plus, the IMF might insist that the receiving country commit to cutting domestic food subsidies or reduce its budget deficit—“structural adjustment” policies that formed part of the “Washington consensus” in the 1980s and 1990s and which still inspire anti-globalization types to pull out their black balaclavas. The IMF remembers the bitter taste those policies left with local populations and has pledged “fewer and more targeted” conditions this time around (and on Wednesday agreed to waive austerity measures in emerging economies). But if a country stalls in its reforms, the IMF can stop the flow of cash—a pretty big stick when, say, Turkey is sitting at its kitchen table with bills to pay.

While there may be a lot of money tucked away that countries can use to bail one another out, recent events have put the IMF in a tough spot, both financially and politically. Like any other multinational agency, the IMF is only as good as its member countries. If a big country, say, South Korea, feels the heat from international lenders, the IMF could be looking at a $50 billion or $100 billion request. After the Asian financial crises of the mid-1990s, the IMF’s forward commitment capacity fell as low as 20 billion “Special Drawing Rights” (an IMF unit then equivalent to around $27 billion); it tripled only after the IMF increased the quota it charged member countries by 45 percent. Will there be political will to supplement the IMF in the coming weeks? Or will a new fund, topped up by new currency reserves, be necessary, as Gordon Brown has mused? In the “New Bretton Woods” era, the IMF might not go under, but it may get left behind.

Explainer thanks Massachusetts Institute of Technology professor and former IMF chief economist Simon Johnson, co-founder of baselinescenario.com and Yoshiko Kamata and Bill Murray of the International Monetary Fund.

http://www.thebigmoney.com/articles/explainer/2008/10/29/bailing-out-bailers

World now in grip of 'Great Recession' warns IMF

World now in grip of 'Great Recession' warns IMF
The world is mired in what future generations may dub the "Great Recession", the head of the International Monetary Fund has declared, in the face of a flurry of negative economic news.

By Edmund Conway
Last Updated: 10:40AM GMT 11 Mar 2009

Mr Strauss-Kahn said that the Fund was poised to cut its forecast for 2009 global economic growth from the paltry 0.5pc expansion it predicted in January.
The global economy faces a contraction in overall gross domestic product for the first time since the Second World War, said Dominique Strauss-Kahn. His warning came as:

• Britain's leading economic forecaster, the National Institute for Economic and Social Research, said the UK economy has given up more than two years' worth of expansion, sliding back to the same size it was in summer 2006. It added that the recession had deepened in the first quarter of the year.

Global economy to shrink for first time since the Second World War

• China slid into deflation for the first time in the crisis, underlining the fact that Western nations' reliance on Chinese growth in the recession may be futile.

• Evidence emerged of an industrial production collapse across Europe, while the Irish central bank chief predicted his economy would shrink by a staggering 6pc this year.

• Eastern Europe's problems intensified, with the European Union pledging its readiness to give money to Romania and experts warning that Serbia's economy will shrink by 3pc unless it is bailed out by the IMF.

Mr Strauss-Kahn said that the Fund was poised to cut its forecast for 2009 global economic growth from the paltry 0.5pc expansion it predicted in January, saying a negative figure was now more likely.

"Since then the news hasn't been good," he said. "I think that we can now say that we've entered a Great Recession. This recession may last a long time unless the policies we're expecting are put in place, in which case 2010 can be a year of return to growth."

The world economy has not shrunk since 1945 because usually the contraction in recession countries has been balanced out by economic growth from elsewhere. However, the IMF chief said this recession was unusual for its breadth and ferocity. "The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes," he said. "Continued deleveraging by world financial institutions, combined with a collapse in consumer and business confidence is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled."

The warning comes only days ahead of the G20 leading economies finance summit, which takes place this weekend. Ministers, including Chancellor Alistair Darling and US Treasury Secretary Tim Geithner, are due to meet to discuss a concerted response to the latest stages of the economic crisis.

NIESR said it had calculated that in the three months to the end of February Britain's economy shrank by 1.8pc. This is steeper than the official contraction of 1.5pc recorded by the ONS in the final quarter of 2009 and means the economy is now back to the same level it was in August 2006 .

http://www.telegraph.co.uk/finance/financetopics/recession/4969652/World-now-in-grip-of-Great-Recession-warns-IMF.html

IMF may run out of cash to fight crisis in six months

IMF may run out of cash to fight crisis in six months, Strauss-Khan warns
The International Monetary Fund could run out of cash to firefight the economic crisis in as little as six months, its managing director has warned.

By Edmund Conway, Economics Editor
Last Updated: 7:02PM GMT 08 Feb 2009

Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.

The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend, where he is attending a meeting of central bankers from Southeast Asia. The Fund has bailed out a number of countries including Iceland, Latvia and Pakistan but Mr Strauss-Kahn said there would be many others in need of help in the months ahead.

"Today, the IMF's resources are enough to face the situation but because we are facing a global crisis, the needs may be much bigger than previously," he said. "We have to intervene in Asia, Africa and Central Europe, Latin America, and maybe elsewhere. I can't promise that in six to eight months from now, we will have enough resources."

The Fund is seeking pledges from nations with large current account surpluses and foreign exchange reserves to donate it cash to help bolster troubled countries. At the World Economic Forum in Davos late last month deputy head John Lipsky is understood to have spent time meeting with various heads of state and of sovereign wealth funds for precisely this purpose. Japan has already offered to add $100bn to the Fund's resources, Mr Strauss-Kahn said.

"We need other countries to follow this generous example and provide funds with the means to address the challenges arising from this global crisis," he added.

He warned that the economic crisis would intensify unless the financial system was repaired, saying that although he hoped the world could avoid a repeat of the Great Depression, the "worst cannot be ruled out. There's a lot of downside risk."

The IMF recently slashed its world growth forecast to just 0.5pc - the weakest since the Second World War, and warned that the UK was facing the most severe slowdown of all developed economies. Although Mr Strauss-Kahn said that government spending packages and interest rate cuts would help, the health of the banking system was a far more important factor.

"All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it's not done."

The IMF has so far lent out $47.9bn to countries affected by the economic crisis - mostly those in Eastern Europe. Mr Strauss-Kahn said that the next victim could be Poland, which has said it does not need assistance now, but may well do in the future.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4560897/IMF-may-run-out-of-cash-to-fight-crisis-in-six-months-Strauss-Khan-warns.html

IMF confident in ability to aid crisis victims

IMF confident in ability to aid crisis victims
By Chris Giles in Davos
Published: January 30 2009 13:37 Last updated: January 30 2009 13:37

The International Monetary Fund expressed confidence on Friday that its members would ensure the fund remains adequately funded and able to support any country that might be hit by the global financial crisis.
Speaking to the Financial Times at the World Economic Forum in Davos, John Lipsky, the deputy managing director of the IMF, said the institution was seeking to double its financial firepower to come to aid any country that needs its support in the downturn.

EDITOR’S CHOICE
Economics upstages diplomatic drama - Jan-30
In depth: Davos 2009 - Jan-28
Mandelson warns on public finance - Jan-30
Video: Bill and Melinda Gates on aid outlook - Jan-30
Erdogan returns to mixed reaction - Jan-30
HSBC pushes for G20-style business grouping - Jan-30

It has already received a pledge of $100bn of contingent reserves from Japan last November and is seeking another $150bn to enable it to lend to countries facing sudden capital flight.
“I am very confident our membership will not allow the situation to emerge where the fund has insufficient resources to fulfil its mandate and responsibilities,” Mr Lipsky said.
Predictions from the Institute of International Finance this week showed the net capital flows to emerging are likely to fall to only $165bn this year, less than a fifth of the level two years ago with banks making a net withdrawal of capital.
Such potential repatriation of cash will place many emerging economies in a vulnerable position, especially those countries with large current account deficits who rely on large capital inflows, Mr Lipsky said.
The IMF wants to make its finances bullet proof so that it can lend to any emerging economies that experience a sudden withdrawal of funds.
In recent weeks, attention has been drawn to the possibility of Southern European countries, Ireland and the UK being vulnerable to a sudden flight of international capital.
Although the IMF does not see signs of imminent need to get involved in any of these countries, officials are making contingency action plans should the need arise. It thinks that the better its finances, the more confidence it can bring to markets, making any intervention a much more remote possibility.
Mr Lipsky downplayed the possibility of the financial crisis morphing into an external financing crisis for large industrial countries. He continued to urge countries to act quickly with necessary reforms to remove uncertainty from financial institutions and to provide stimulus for their economies. “In current circumstances it is preferable to commit errors of commission rather than omission,” he said.
Mr Lipsky reiterated the fund’s pessimistic view of economic prospects in the world for 2009, which is likely to record the slowest rate for world output growth since the second world war.
But he stressed there were forces for recovery – lower energy prices, China’s expected growth, the continued spending of oil exporting countries even as energy prices fall, the lack of leverage of non-financial companies – which would help the world emerge from recession in 2010.
Refusing to discuss the aggressive comments of Tim Geithner, the US Treasury secretary, regarding the Chinese currency, he nevertheless pointed to the failure of all the world’s leading economies to address trade imbalances before they contributed to the current economic crisis. He said the policies agreed by the US, eurozone, China, Saudi Arabia and Japan, in 2006 and 2007 to deal with global imbalances “were applied with insufficient vigour”.
In this respect he praised the Chinese stimulus package as something the IMF was counting on to restore global growth. “The [Chinese] policies put in place are consistent with its long-term interests,” he said because they would encourage domestic expansion rather than the previous focus on exports.

http://www.ft.com/cms/s/0/f1c9c6d8-eed1-11dd-bbb5-0000779fd2ac,dwp_uuid=261fcad4-db24-11dd-be53-000077b07658.html

A Brief History of Bretton Woods System

Delegates attend the Bretton Woods conference in July of 1944 at the Mt. Washington Hotel in Bretton Woods, New Hampshire
Alfred Eisenstaedt / Time & Life Pictures / Getty

A Brief History of
Bretton Woods System
By M.J. Stephey Tuesday, Oct. 21, 2008

time:http://www.time.com/time/business/article/0,8599,1852254,00.html

Since the end of World War II, the U.S. dollar has enjoyed a unique and powerful position in international trade. But perhaps no more.


More Related
The Bright Side of Friday’s Dow Drop
Fix It Before It’s Broke
Summer Slump

Before boarding a plane on Saturday to meet President George W. Bush, French President Nicolas Sarkozy proclaimed, "Europe wants it. Europe demands it. Europe will get it." The "it" here is global financial reform, and evidently Sarkozy won't have to wait long. Just hours after their closed-door meeting had finished, Bush and Sarkozy, along with European Commission President Jose Manuel Barroso, issued a joint statement announcing that a summit would be held next month to devise what Barroso calls a "new global financial order."

The old global financial order is, well, old. Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank.

The former was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the latter to provide underdeveloped nations with needed capital — although each institution's role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee, of sorts, to fund these institutions; the amount of each contribution designated a country's economic ability and dictated its number of votes.

In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell U.S. dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the U.S. dollar began.

For his part, legendary British economist John Maynard Keynes, who drafted much of the plan, called it "the exact opposite of the gold standard," saying the negotiated monetary system would be whatever the controlling nations wished to make of it. Keynes had even gone so far as to propose a single, global currency that wouldn't be tied to either gold or politics. (He lost that argument).

Though it came on the heels of the Great Depression and the beginning of the end of World War II, the Bretton Woods system addressed global ills that began as early as the first World War, when governments (including the U.S.) began controlling imports and exports to offset wartime blockades. This, in turn, led to the manipulation of currencies to shape foreign trade. Currency warfare and restrictive market practices helped spark the devaluation, deflation and depression that defined the economy of the 1930s.

The Bretton Woods system itself collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands. By 1973, most major world economies had allowed their currencies to float freely against the dollar. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation.
It seems the East Coast might yet again be the backdrop for a massive overhaul of the world's financial playbook.

U.N. Secretary-General Ban Ki-moon publicly backed calls for a summit before the new year, saying the agency's headquarters in New York — the very "symbol of multilateralism" — should play host. Sarkozy concurred, but for different reasons: "Insofar as the crisis began in New York," he said, "then the global solution must be found to this crisis in New York."

http://www.time.com/time/business/article/0,8599,1852254,00.html?xid=rss-business