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    IMF urges collective central bank action against credit crisis

    AFP
    09 Ekim 2008 - 16:33Son Güncelleme : 09 Ekim 2008 - 16:33

    The International Monetary Fund urged central banks Tuesday to collectively throw life lines to a global banking system sinking in financial turmoil, saying $675 billion was needed over the next five years.

    Loan defaults in the United States, the epicenter of the financial crisis, are still rising and declared losses are expected to reach $1.4 trillion, the IMF said in a grim Global Financial Stability Report (GFSR).

     

    That was substantially higher than the $945 billion estimated in the April GFSR, which at the time was criticized by some economists as excessively high.

     

    Dominique Strauss-Kahn, the head of the 185-nation institution, called for urgent action to confront the worst financial crisis since the 1930s Great Depression and a crisis of confidence so deep that banks are afraid to lend to each other.

     

    "The time for piecemeal solutions is over. I therefore call on policymakers to urgently address the crisis at a national level with comprehensive measures to restore confidence in the financial sector," the IMF managing director said in a statement.

    "National governments must closely coordinate these efforts to bring about a return to stability in the international financial system," he added.

    The GFSR was published ahead of the annual meetings of the IMF and World Bank this weekend, when world leaders and private financiers gather in Washington to discuss the global economy and poverty.

    It came as markets worldwide quaked under a near-collapse of the credit flows that are the lifeblood of the global economy, despite hundreds of billions of dollars pumped into the fragile banking system by central banks.

    "With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system," the IMF said.

    "Failure to do so could usher in a period in which the ongoing deleveraging process becomes increasingly disorderly and costly for the real economy," the IMF warned, a day ahead of publishing world economic growth forecasts it has signaled would be lowered from a July update.

    Jaime Caruana, IMF director of the monetary and capital markets, said the gravity of the crisis required a strong public sector intervention.

    "We don’t want to propose to governments specific measures, but we do think they should address three issues: the capital of the banks, the troubled assets, and the funding," he said at a news conference.

    In a speech in Washington, John Lipsky, the IMF’s deputy managing director, called for improved coordination of market oversight.

    "The global market turmoil also has exposed a lack of clarity about the respective roles of regulators, supervisors, central banks, and fiscal authorities in the event of a systemic financial crisis," Lipsky told a meeting of economists.

    The IMF cautioned that central bank lending facilities aimed at restoring the functioning of interbank markets should provide incentives for market participants to start dealing among themselves "and thus to allow for an orderly exit by the central bank once more extreme strains have eased," it said.

    "To keep private sector credit growing, even modestly, while strengthening bank capital ratios, the GFSR estimates some $675 billion in capital would be needed by the major global banks" over the next five years, the IMF said.

    "The global financial system has entered a new phase of the crisis, where the threat to solvency of some institutions has led to persistent, widespread counterparty risk concerns and required the commitment of public resources to contain systemic risks and the economic fallout."

     

    The GFSRs release coincided with a US Federal Reserve announcement of plans to buy commercial paper, mainly short-term loans, from private firms in an emergency bid to unblock short-term corporate lending amid the current global credit crunch.

    To raise the estimated 675 billion dollars of additional capital needed to keep credit growing, the IMF suggested that authorities may need to inject capital into viable institutions.

    Under "extreme circumstances," deposit insurance of individual retail accounts could be expanded beyond normal limits and, if conditions deteriorated further, a blanket guarantee could be undertaken as a temporary, emergency measure, "best undertaken in a coordinated fashion across countries."

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