IMF says financial stability still at risk

Europe and the United States have failed to strengthen the institutions responsible for the global economic crisis, the IMF indicated Tuesday in a report suggesting the United States privatise mortgage giants Freddie Mac and Fannie Mae.

In the eurozone, the International Monetary Fund pointed to "weak balance sheets" of governments and banks and said the European bailout fund needs to be increased from its headline €440 billion.

European banks will need continued financial support and require rigorous "stress-testing," it said. Those that cannot stand the strain should be closed, it recommended.

Global financial instability will continue for another two years, the International Monetary Fund warned, with an uneven pace of recovery between sluggish advanced economies and buoyant developing ones.

"While progress has been made and most financial sectors are on the mend, risks to global financial stability remain," the report said.

Chief IMF economist Olivier Blanchard said Tuesday the "still weak labour and housing markets" in the United States have contributed to a fiscal deficit more than double that in the euro area, and could impact the global economy.

"The absence of a credible, medium-term fiscal strategy would eventually drive up US interest rates, which could prove disruptive for global financial markets and for the world economy," the report said.

It suggested a speedy action plan, possibly including the privatisation of mortgage giants Freddie Mac and Fannie Mae, which some accuse of fuelling the US housing crisis. Freddie Mac and Fannie Mae are responsible for about half of all mortgages in the United States.

They "could be either privatised or converted to public utilities with an explicit (and explicitly funded) guarantee," the IMF said.

Nevertheless, the IMF gave the United States the largest projected increase compared with its October report, raising anticipated economic growth in 2011 from 2.3 per cent to 3 per cent. Still, Blanchard warned the predicted growth "is not going to be able to make a big dent," in high unemployment rates.

US unemployment will hover at nine per cent by theend of 2011 and 8 per cent by the end of 2012, Blanchard predicted. The unemployment rate was 5 per cent three years ago.

Globally, the IMF raised its projections for overall economic output to an increase of 4.4 per cent in 2011, slightly higher than the 4.2 per cent anticipated in the Washington-based institution's October report, but slower than the 5.0 per cent achieved in 2010.

The IMF made no change in its forecasts for the rest of the world, with Asian giants leading the way: China at 9.6 per cent and India at 8.4 per cent growth. Also unchanged was the forecast for Japan and the 17-country eurozone, at 1.5 per cent.

According to the IMF, the economies of advanced countries will expand by 2.5 per cent in the next two years while emerging and developing countries are expected to continue a strong rebound and grow by 6.5 per cent in the same period.

Advanced economies are increa-singly sensitive to accumulated debt, it says, while policymakers in emerging markets like Brazil and China are grappling with how best to absorb the cash from rising commodity prices and investors without overheating their economies.

Progress in advanced economies will be slow coming, Blanchard said. They are "in a fiscal hole, large debt, large deficit and these have to be slowly eliminated and that's going to take a long time".

Sub-Saharan Africa is expected to show the strongest regional progress, at 5.8 per cent.

Blanchard said capital flows to emerging market countries were "both a blessing and potentially a curse," providing cheap imports but the danger of overheating economies with an influx of cheap money from advanced countries with low interest rates .

China can help ease imbalances by raising the value of its currency, Blanchard said.

The US and other countries charge that China keeps its currency artificially low to maintain an export advantage.

"China is moving in the right direction and focusing increasingly on domestic demand, but we think it can be done faster," he said.

- AP