IMF: Global Financial System Still Under Acute Stress

The International Monetary Fund [IMF] warned Friday that the global financial system remains still under acute stress and pointed to “worrisome parallels” between the current recession and the Great Depression.

Releasing two advance chapters from its World Economic Outlook, the Fund said the current recession—its association with deep financial crisis and its highly synchronized nature—suggest the risks associated with the global economic downturn remain and are greater this time.

Via IMF: While the credit boom in the 1920s was largely spec­ific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact.

Despite the unprecedented steps already taken by central banks and governments worldwide, the Fund believes the recession is likely to be “unusually long and severe, and the recovery sluggish.”

Dominique Strauss-Kahn, head of the IMF called for a urgent action to “cleanse banks” of toxic assets:

Forceful and urgent action is needed to cleanse balance sheets and recapitalize banks, as well as coordination among the affected economies. “Until this is done, attempts to restore demand are likely to falter,” said Strauss-Kahn.

IMF’s Chief called for further fiscal stimulus beyond the 2% of global GDP already agreed and said that “the free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today.”

At this point no one really knows what the outcome of this recession will be. However, a possible scenario is that of a one-two year period of near zero inflation, with deflationary effects in various product segments. Let’s hope consumer demand starts increasing again.

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