Saturday, April 12, 2008

IMF warns of 'fire and ice' threat to the world

By Edmund Conway in Washington
Last Updated: 1:14am BST 13/04/2008
The head of the International Monetary Fund has warned that the world economy is trapped between "fire and ice" - the threat of slumping growth and of rising inflation. Opening the IMF's spring meetings, Dominique Strauss-Kahn told ministers coming to Washington that there was only limited time to repair the financial system after the worst crisis since the Great Depression. Speaking with oil prices at record highs, he declared that "inflation may be back" and warned the relentless rise of food prices would hit efforts to reduce poverty in Africa and Asia.
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In a final blow to the so-called "Goldilocks theory" that developing nations' growth will help keep the world economy supported in the coming months, he debunked the idea that rich and poorer countries could "decouple".
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However, he added that while the economic impact of the financial crisis would be more severe than that of the dotcom bubble, it would leave a smaller dent on growth than in previous crises.
He said: "Rising global food prices may undermine gains in reducing poverty," adding that food prices had increased by 48pc since the end of 2006. The warning coincided with another from World Bank president Robert Zoellick that rising food prices threaten to set back development efforts by seven years.
Mr Strauss-Kahn added: "The world is caught between ice and fire - slower growth and inflation. Inflation is back. It is a key concern. I think there is no such thing as decoupling, but [instead] there is a delay."
The IMF this week slashed its figure for global economic growth to 3.7pc, forecast a US recession this year and warned of a one-in-four chance of a global recession. It also cut its UK growth forecast to just 1.6pc this year and next.
Mr Strauss-Kahn said the fund was ideally placed to play a key role in the rescue mission following the crisis, since it was one of the few institutions to analyse the links between the financial markets and real economies. He acknowledged the IMF was "not able to make people listen" when it warned on the possibilities of a major financial crisis 12 months ago.
Alistair Darling will today risk putting himself at odds with the IMF by urging further major overhauls to the fund. He will suggest it sets up a new department to analyse how problems in one part of the world affect other economies; a new "early warning system" for the global economy and replacing the IMF's main decision-making committee with a council of finance ministers.
He will say: "The critical point is that all long-standing organisations need to be ready to change. Without change, without reform and without the ability to demonstrate leadership and innovation, they will become marginalised and ineffective in supporting the co-operation needed to deal with global events and issues."
Mr Strauss-Kahn yesterday insisted: "The IMF will soon be the first institution created after World War Two which will prove itself able to reform itself."
Fed backs overhaul
Federal Reserve chairman Ben Bernanke said regulators must move ahead on ways to prevent a future financial crisis, even as they battle one that threatens to plunge the US into recession.
“We do not have the luxury of waiting for markets to stabilise before we think about the future,” he said, offering a strong endorsement of a proposed broad overhaul of financial regulation under which he would gain oversight of securities firms which now have access to the Fed’s emergency lending facilities.

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