Global Economy Crisis Brings World Finance Leaders Together

Financial leaders from around the world are converging on Washington for meetings of the International Monetary Fund (IMF) and the World Bank April 12-13 against the backdrop of growing concerns about the global economy.

Simon Johnson, IMF director of research, said the subprime mortgage housing crisis in the United States has brought economic growth in the world's largest economy nearly to a standstill. The U.S. economic turmoil, he added, has prompted the IMF to lower its projection for global growth in 2008 to 3.7 percent, well below its earlier prediction of 4.9 percent.

In addition, European Union member states that have adopted the euro currency are slowing to 1.4 percent projected growth rate in 2008. Johnson attributed the anemic growth rate to weakening external demand due to the U.S. downturn, a stronger euro, continued financial market strains and rising energy costs. He added that housing downturns have been a problem in some European countries.

Jaime Caruana, director of the IMF's Monetary and Capital Markets Department, said there has been a "collective failure" to appreciate the economic damage caused by the subprime crisis.

"The credit shock emanating from the U.S. subprime crisis is set to broaden amid a significant economic slowdown," Caruana said, briefing reporters April 8 about the coming IMF-World Bank meeting. "The deterioration in credit has moved up and across the credit spectrum to prime residential and commercial mortgage markets and to corporate credit markets. As the credit cycle turns, default rates are likely to rise across the board."

The economies of the emerging markets so far have not been affected severely by the subprime crisis because of improved policies, strong balance sheets and favorable macroeconomic conditions, according to Caruana. But he cautioned that the danger of contagion still was present. Caruana said the immediate challenge for policymakers as well as financial institutions is to contain and mitigate systemic risks and economic spillovers.

"The IMF is fully engaged in a wider effort by national authorities and international bodies to analyze and learn from the recent turmoil," Caruana said.

Johnson said many emerging and developing economies are threatened by inflation and the risk of becoming overheated. He said governments of emerging economies could ease pressure on food and energy prices by adopting more open trade policies in those areas.

In addition to offering analyses and policy recommendations on the global economy, the IMF and World Bank will address proposals for internal reform with the intention of giving emerging market countries and poorer countries greater say in running the IMF.

IMF Managing Director Dominique Strauss-Kahn said the IMF executive board favors a reform proposal for the IMF to adjust its structure to the "dynamic and changing realities of the global economy."

"We are creating a more flexible system ... which involves further changes over time as the relative positions of countries in the world economy evolve," he said.

The participants in the meeting will vote on a package of measures intended to set IMF finances on a sound long-term footing. The key element of the package is to sell 403.3 metric tons of gold from the IMF's gold holdings and establish an endowment with the profits.

Strauss-Kahn said the plan, if implemented, "will put the institution on solid financial footing and modernize the IMF's structure and operations."