IMF for more lending capacity to tame crisis

IMF chief economist says European growth very close to zero, expects substantial cut to the 2012 global expansion estimate of 4%

The International Monetary Fund (IMF) said it aims to expand lending capacity to counter the impact of Europe’s escalating sovereign-debt crisis, which has caused the global economic outlook to deteriorate “noticeably.”

“In the coming weeks, we will be making the case for a step up in the Fund’s lending capacity,” IMF First Deputy Managing Director David Lipton told a forum in Hong Kong on Monday. “The goal is to be able to augment the resources Europe will be putting into tackling its problems, but also to be able to meet the needs of innocent bystanders around the world.”

The Washington-based fund will cut its global growth estimate for 2012 next week, with Europe’s crisis threatening to further hurt world economic expansion, Lipton said. European leaders are trying to rescue efforts to deliver new fiscal rules and cut Greece’s debt burden as they seek to reassure investors after Standard & Poor’s decision to cut the ratings of nine euro region nations, including France, on January 13.(DOWNTURN)

“The European outlook is grim and the risks for Europe and the world are high,” Lipton said on Monday. “Concerns about fiscal sustainability and banking sector losses have widened sovereign spreads to unprecedented levels for many euro area countries. Bank funding has all but dried up in the euro area, leading banks to delever by selling assets and restrict lending. Now deleveraging threatens to push growth below even the reduced forecast we will publish next week.”

Asia at risk
The IMF is scheduled to release revised global projections on January 24. Olivier Blanchard, the Washington-based fund’s chief economist, said in a Bloomberg Television interview earlier this month that with European growth “very close to zero at this point,” there would be a “substantial” cut to the most recent 2012 global expansion estimate of four per cent. “Global economic activity has generally worsened in the last quarter of 2011, and the near-term outlook has deteriorated noticeably” since the IMF’s September projections, Lipton said.

While Asia’s economy is currently “strong,” Europe poses risks to the region’s prosperity, Lipton said. China will grow at a “reasonable rate” and expansion in that country will probably slow at a “smooth” pace, giving the nation a “soft landing,” he said.

“Should downside risks materialise in force, policy makers in Asia would need to respond swiftly, as they did in 2008-09,” he said. “The response would have to include reversing fiscal consolidation, for those with sufficient space to do so, and aggressively easing monetary policy. This might require cutting policy rates but also adopting a range of non-traditional measures, including the introduction of targeted credit easing measures, for example, on commercial paper, corporate bonds, and SME credit.”

Using reserves
Introducing guarantees for bank liabilities and supporting trade financing could also be considered, he said. To do so, Asian economies could use their “ample” foreign-exchange reserves, and, where necessary, regional reserve pooling arrangements, Lipton said.

While the US economy will expand this year, its growth may not be strong enough to cut the jobless rate, he said.

In Europe, Italy is making “serious, important efforts” to convince markets its fiscal situation is sustainable, Lipton also said. There is a “good chance” of resolving Europe’s problem with “political will,” he said, adding that more fiscal consolidation, growth and financial integration will be needed.

Europe could face a “downward spiral of collapsing confidence, stagnant growth and fewer jobs” without “bold action,” he said. The region’s countries need to provide “large funding” to the IMF to help Europe, Lipton said.

“If we are going to play a larger role in helping Europe, it would have to be done after stepping up of the fund’s resources,” Lipton said. “Europe will obviously need to provide a large amount of funding to help European countries.”