IMF chief sees hope in market turmoil

IMF chief sees hope in market turmoil
By John Thornhill in Cernobbio

Last updated: September 9 2007 21:48

Rodrigo de Rato, managing director of the International Monetary Fund, has said the dramatic repricing of risk in the financial markets should be healthy for the medium-term stability of the global economy even if it results in short-term pain.

“This reckoning is probably a welcome one but it does not mean that it will be a painless one,” he told the Financial Times in an interview at the Ambrosetti forum in Cernobbio, Italy.

Rodrigo de Rato, managing director of the International Monetary Fund, discusses with John Thornhill the crisis in the markets and ways to restore trust
He said the credit squeeze was a “serious crisis” that was still unfolding with a high degree of uncertainty. He said its effects would be limited by the strength of the global economy and the high credibility of monetary authorities around the world.

Mr de Rato, outgoing head of the IMF, said regulators needed to learn lessons from the incorrect pricing of risk in the US housing market that led to the subprime mortgage problems.

He suggested that regulators should re-examine the legal perimeters of financial institutions to assess the real risks from off-balance sheet structures.

Mr de Rato was attending a conference of leading policy makers at which private-sector financiers urged the Federal Reserve in the US and the European Central Bank to do more to reassure the markets.

Jim O’Neill, chief economist at Goldman Sachs, said the credit squeeze confirmed his view that the US economy would grow at below 2 per cent, probably for the next six quarters. “The big issue is whether the Fed can keep it from tumbling over into being a lot weaker.” He suggested the Fed must prevent the US housing market sinking into a depression resembling the Japanese property crisis of the 1980s.

Ken Rogoff, former chief economist at the IMF, said the world was experiencing its “first new-age financial crisis” that was following an unpredictable path and posing new problems for the world’s monetary authorities.

“We are in a window of vulnerability,” he said. “We have reached the point where there is going to be fairly aggressive interest rate moves and if that proves not to be enough then we may see some dramatic regulatory intervention,” he said.

Mr Rogoff even suggested that a further twist in the financial crisis could help clarify issues. “Having a medium-sized bank go under would almost be a blessing at this point because it would give them [central banks] confidence to do something more dramatic.”

He estimated that the risk of a full-blown recession in the US over the next 12 months had risen to 25-30 per cent, against 10-15 per cent in a normal year.

Separately, four trade bodies for global bond markets will this week call for “immediate and ongoing disclosure” on where US subprime mortgage risk resides among investors who use short-term debt markets for funding.

It is hoped that such moves, to be outlined on Wednesday, will help restore confidence in the short-term asset-backed commercial paper markets that have all but seized up in recent weeks.