[GJM] Fwd: IMF: risk of global crash is increasing

[dharao4]

--- In feasta at yahoogroups.com, Richard Douthwaite <richard at ...> wrote:

IMF: risk of global crash is increasing
http://news.independent.co.uk/business/analysis_and_features/article15
23194.ece

By Philip Thornton, Economics Correspondent in Singapore

Published: 13 September 2006

Financial markets have failed to price in the risk that any one of a 
host of
threats to economic stability could materialise and deliver a massive 
shock
to the world economy, the International Monetary Fund warned 
yesterday.

The world's chief financial watchdog said the financial system had so 
far
proved resilient in the face of recent price falls but warned the 
risk of a
crash had increased. And when it comes to worrying about a crash in 
the
financial markets that could deliver a body blow to the world 
economy, it
seems that all roads lead to the US.

The IMF highlighted five major risks, all but one of which can be 
attributed
to a greater or lesser extent to the economy and foreign policies of 
the US
administration. Not that the politically savvy IMF phrases it exactly 
like
that.

Its message coincided with a stark warning from HSBC, one of the 
world's
largest investment banks, that it had put the US on alert 
for "recession
risk".

The fund, which is holding its annual meetings this week, issued its 
warning
in its closely watched, twice-yearly Global Financial Stability 
Report. It
highlighted a sharp slowdown in the US economy, triggered by a slump 
in house
prices, as the major risk. Other dangers included:

* A surge in inflation that would force central banks, particularly 
the US
Fed, to impose sharp rate rises that would ripple through emerging 
markets

* A rebound in oil prices on the back of mounting speculation of 
geopolitical
tensions - a reference to a showdown between Iran and the US over 
nuclear
technology

* A sudden unravelling of the record imbalances between surpluses in 
Asia and
deficits in the US

* A mutation in the avian flu virus that would lead to a "sharp 
decline in
economic activity".

Jaime Caruana, director of the IMF's monetary and capital markets 
department,
said: "Markets appear to price in little provision for these risks. 
So if one
or some combination of these risks materialises, financial markets 
could
experience greater turbulence that places stress on international 
markets,
possibly with a wider impact on the global economy."

He said markets were now much more focused on a US-led global 
slowdown rather
than the threat from global imbalances that has worried the IMF for 
the past
six years.

However Hung Tran, Mr Caruana's deputy, said: "Comparable countries 
such as
the UK and Australia experienced a strong upturn in prices and then a
deceleration and the process has been seen as a soft landing so there 
is hope
- which is our central case - that the US will experience something 
similar.

"However, it is clear that the risks are on the downside of a sharper 
than
expected slowdown [in house prices] that would produce weaker-than-
expected
growth that would have implications for global growth and financial 
markets."
This risk segues directly into fears of a slump in the dollar. HSBC 
issued a
"recession-risk" alert for the US economy that would trigger a sharp 
fall in
the dollar and pound.

David Bloom, a global economist, said the US would slow sharply next 
year,
prompting investors to pull out of their massive gambles on US assets 
that so
far had succeeded in offsetting record trade deficits. "Once these 
assets
stop performing well and the dollar drifts lower, the dollar and 
asset cycle
can turn more vicious. Once one does not want to buy an asset because 
of the
fall in the dollar then the dollar starts to impact back on assets."

The IMF said its assumption was that any decline in the dollar would 
be
"orderly", but there could be a more pronounced drop. It warned one 
reason
the dollar could fall would be if investors believed it was clear the 
world's
leading economies would fail to take action to resolve the imbalances 
between
saving and demand across the world.

"A gradual and orderly adjustment would very likely depend on a 
credible
policy framework for resolution of global imbalances over the medium 
term,"
the report said. "Accordingly, the risk of a disorderly dollar 
adjustment
could arise without policies being put in place to foster the needed
adjustments in savings and investment imbalances."

The IMF has done its bit, setting up a multilateral consultation 
between China
and the US, as well as Saudi Arabia, to find a way to resolve the 
imbalances.

Its keynote world economic outlook published tomorrow will undoubtedly
reiterate that the US must cut its deficits, China must liberalise its
financial system and allow its currency to appreciate, the oil-rich 
countries
should invest their windfall for growth while Europe should do more 
to boost
its sluggish growth rates.

A fall in the dollar would also add to the inflation in the US as 
import costs
rose. Inflationary pressures have been rising thanks to soaring 
energy costs.

The GFSR report showed that while long-run inflation expectations in 
the US
have picked up, the inflation-related risk premium that investors are 
forced
to pay has declined. "Should these gains erode and risk premiums for
unexpected inflation increase, asset markets could come under 
pressure with
potentially negative consequences for the real economy," it said.

Meanwhile, oil prices jumped more than a dollar a barrel yesterday, 
ending a
run of recent declines. US oil prices broke back through $66 a barrel 
after a
foiled attack on the US embassy in Damascus.

Unsurprisingly, the IMF did not give estimates for the financial 
implications
of a dollar crash. But last month it published research by a leading
economist that found, with a 10 per cent fall in the dollar, US 
stocks and
bonds would wipe out $1.2 trillion of wealth held for foreigners.

The research found that UK investors held $471bn of US assets, the 
second
largest in the world behind Japan. However, a national 10 per cent 
slump in
asset prices would wipe out the equivalent of 5 per cent of GDP 
compared with
almost 15 per cent in Italy.

The IMF did highlight consensus forecasts yesterday showing even an 
orderly
decline in the dollar would not be shared equally across the world. 
The
forecasts showed the fall would be absorbed entirely by a rise in the
currencies of Japan, China, Korea, Taiwan, Singapore and Malaysia. On 
a
general note, the IMF said the financial system had withstood a fall 
in
prices and a rise in volatility in May after an unexpectedly large 
rise in
inflation.

The IMF said corporate fundamentals were still solid, equity 
valuations were
not stretched in most markets and major financial institutions were
profitable and well capitalised.

However, it remarked: "In these circumstances it is reasonable to 
wonder
whether financial markets might react to less favourable developments 
in a
way that would amplify - rather than dampen - the emerging risks." The
trigger for a shock to asset prices can come out of the blue, perhaps 
a
natural disaster or a health epidemic such as bird flu.

The IMF reiterated its fears that an outbreak would reduce investors' 
appetite
for risky investments, cut capital flows between companies and weaken
financial systems as absenteeism rose.

David Nabarro, the senior UN System Co-ordinator for avian and human
influenza, is in Singapore at the weekend to meet Jim Adams, head of 
the
World Bank's avian flu taskforce.

But could political instability - such as that at the highest levels 
of the
Labour Government this week that knocked the pound - trigger a crash? 
Mr Hung
dodged the specific question, but said: "In the short term, this is 
very
noisy and can distort uncertainty in exchange rates so we try to look 
over
the medium term." Mr Caruana added: "There will always be surprises - 
but
surprises are surprises."

.............

http://www.iht.com/articles/2006/09/12/business/imf.php
World economies face risks from oil and housing, IMF says

Bloomberg News, Reuters
Published: September 12, 2006

VIENNA A slowing U.S. housing market and the possibility of a major 
oil supply
disruption are two of the biggest risks to economies worldwide, the 
head of
the International Monetary Fund, Rodrigo Rato, said Tuesday.

  In a speech here underscoring the importance of stable oil flows to 
economic
growth, he also said moves by some oil-producing countries to raise 
taxes on
international oil companies or change contract terms could result in
investment cuts by the companies.

  "With the housing market in the U.S. cooling faster than 
anticipated, there
is a risk of an abrupt slowdown in the U.S. which could derail the 
global
expansion," Rato told an OPEC conference of policy makers and oil 
executives.

  "Furthermore, sudden or unexpected supply disruptions in the oil 
market -
should they occur - could have more adverse effects than have 
occurred up to
now," he said.

  Iran's disagreement with the United Nations Security Council over 
its uranium
enrichment program has raised concerns about a cut in oil supplies.
Elsewhere, militants have shut a quarter of oil output in Africa's 
biggest
oil producer, Nigeria. Iraq's exports also remain vulnerable to 
sabotage.

  Rato called on governments of oil- producing countries to ensure 
that their
polices encouraged investment and spread risk between themselves and 
the
companies drilling for oil.

  A trend to resource nationalism is gathering pace in Venezuela, 
Bolivia,
Chad, Algeria and Russia. Emboldened by high oil prices, governments 
are
seeking more cash and control from multinationals that drill in their 
oil and
gas fields.

  "Recent moves in various producer countries to change the taxes or 
terms of
contracts of oil companies may raise government revenues in the short 
term,"
Rato said.

  "But this could backfire, as they create significant disincentives 
to new
investment in oil production, thus ultimately affecting the 
governments'
long-run revenues."

  OPEC, producer of 40 percent of the world's crude, said Monday that 
it would
keep its production at current levels amid waning demand.

  Meanwhile, the International Energy Agency lowered on Tuesday its 
global oil
demand estimates for 2006 and 2007, spurred by an economic slowdown 
in the
United States, the world's largest consumer of energy.

  Some OPEC ministers, including those from Nigeria, Venezuela and 
Algeria,
have expressed concerns that slower growth in the United States could 
further
weaken oil prices. Crude has retreated 16 percent from a record 
$78.40 on
July 14 in New York amid slower growth in demand and above- normal
inventories.

  "It's more a situation where the demand could fall very quickly," 
Chakib
Khelil, Algeria's oil minister, said Monday. "You could have also
confirmation of the recession, which would mean very low demand."

  Rato said that the effect of high oil prices had been moderate so 
far, in
large part because they had been accompanied by strong demand for 
other
commodities and services. $@



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