IMF predicts global slowdown

By LUCY FARNDON
Updated:

 

The International Monetary Fund warned that the turmoil in credit markets is likely to be 'protracted' and lead to a slowdown in global economic growth.

Rodrigo Rato - IMF

In its twice-yearly Financial Stability Report, the Washington-based organisation warns that the crisis will have ' significant and far-reaching' consequences.

It adds: 'The coming months are likely to remain challenging for money markets and institutions, and credit conditions are not likely to normalise soon.'

The IMF's gloomy forecast was compounded by reports from Germany that suggest Deutsche Bank is facing a £1.1bn loss from its high-risk loans.

The banking giant hasn't yet disclosed its likely third quarter hit, but the speculation will heighten worries that UK banks such as Barclays and HBOS may also have to disclose big writedowns later this year.

IMF managing director Rodrigo Rato says global growth in 2008 is likely to be below levels seen in 2006 and 2007. He believes that the risks become more acute the longer the financial markets remain in trouble. However, he still expects the world economy to remain strong.

The US, which is responsible for one third of global output, will be hardest hit. The IMF believes failing sub-prime loans will continue to be a problem 'at least through 2008'.

It estimates that if American home prices fall 5% in a year and then stabilise, bad debts from risky loans would be as high as £85bn.

A quarter of that would be lost by the banks and the remainder lost by holders of mortgage backed securities. Rato points out that governments and markets were caught by surprise by how rapidly the U.S. subprime problem led to contagion elsewhere.

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The IMF believes that regulatory changes may be needed to ensure better supervision of financial institutions, and that the banks themselves may also have to change their practises.

Though the effects of the US housing market have primarily hit North America, the IMF says that there could also be a knock-on effect for developing countries - especially those who have seen rapid credit growth in recent years.

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