"Nearing the end of the year’s third quarter, most advanced economies are either virtually stagnant or on the verge of recession, while underlying inflation risks are becoming increasingly well-contained," John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech to the Center for Strategic and International Studies.
A "damaging global recession" could still be avoided, he said, but any recovery would likely be gradual and public funds may be necessary to safeguard the financial system.
"A more systematic approach may be needed to deal with such basic issues as the disposition of distressed assets, the degree of protection offered to depositors, and the scale and scope of liquidity support that is offered to institutions and markets," he said.
Lipsky said more financial institutions will fail, while he stressed that a systemic failure must be avoided.
"This is probably a moment in which we should take a step back and think broadly about what kinds of intervention might be needed to justify an attempt to look at this in a more coherent, more proactive way," Lipsky said, adding that events over the past several weeks have required quick judgments.
"It is also very clear this needs to be done in an internationally coherent and decisive way," he said.
While U.S. and European banks hurt by the year-long credit crisis have raised capital, "these infusions are still some $150 billion less than the write-downs, and further capital raising will become much more expensive, if not impossible," he said.
The slowdown in developed countries should help contain inflation and the IMF believed monetary policy was broadly appropriate across most advanced economies, but there was scope for both the European Central Bank and the Bank of England to lower interest rates, Lipsky said.
In emerging economies, most countries could take a "wait-and-see" approach on interest rates, although some were still grappling with serious inflation risks and their monetary policy should have a tightening bias.
Lipsky said so far emerging markets have been relatively insulated from the financial turmoil, in part because many have been capital exporters and have managed current account surpluses.
But he warned that these economies could face large reversals of capital flows, with serious implications for economies’ activity and their financial institutions.
He said the IMF was closely watching access by these countries to international markets, especially for emerging markets that depend on large-scale capital inflows to finance current account deficits. Reuters