Poreg view: Downside risks to the global economy are increasing by the day. And this is the message that comes loud and clear from the address of IMF chief Christine Lagarde at the annual meeting of central bankers, economists and international financial officials held in an American city on Saturday, Aug 27. Sharp fall in economic growth in the US and Europe, the mounting sovereign debt crisis, and eroding confidence in the solvency of major Western banks particularly in Italy are all pointes to a dangerous phase in global economy with the US, the shining knight in white armor being sucked into the vortex of recession.
So, when Lagarde told her audience that ‘we risk seeing the fragile recovery derailed’ she said the most obvious. The stakes are high for every nation. Act they must now to ward off a new global financial crisis, similar to the meltdown that followed the Wall Street crash of September 2008 because, as the IMF chief said, ‘If growth continues to lose momentum, balance sheet problems will worsen, fiscal sustainability will be threatened, and policy instruments will lose their ability to sustain the recovery’.
As commentator Barry Grey says, both in tone and substance, Lagarde’s remarks were markedly different from those of Federal Reserve Chairman Ben Bernanke, and European Central Bank President Jean-Claude Trichet.
Bernanke has sought to reassure the markets that the US economy remains sound and that it would grow more rapidly. This rosy picture is good to hear but doesn’t inspire confidence amidst signs of a global contraction and indications of a new banking crisis in the US itself. Trichet, like most of his contemporaries, does not think that Europe is heading for trouble. ‘The idea that we could have a liquidity problem in Europe… is …plain wrong’, he was quoted as saying. European bankers termed IMF managing director hoisting of cautionary signal, according to the Financial Times of London, as making a ‘confused’ and ‘misguided’ attack on the health of Europe’s banks.
These statements are a grim reminder, if a reminder is necessary, of the sharp divisions within the global financial elite over how to deal with the worsening crisis. Most European banks are fiercely opposed to mandatory recapitalization, a prescription the IMF chief is offering. The American banks, on their part, are against any move that would make them revisit the home loan mortgages. Austerity is a good word in the lexicon but not as an economic recovery tool. This in short is the problem as the economists, finance ministers and central bankers grope for an answer to the question- how to stave off a descent nearly three years after the September 2008 crash toward a full-scale depression.
-m rama rao
