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Business News/ Politics / News/  Real impact of credit crunch next year: IMF
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Real impact of credit crunch next year: IMF

Real impact of credit crunch next year: IMF

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Most of the impact of the global credit crunch will be felt in 2008 and the US will be hardest hit, International Monetary Fund (IMF) managing director Rodrigo de Rato said on Monday. World economic growth should remain high next year but looks set to be below the levels of 2006 and 2007 and downside risks increase the longer financial markets remain in crisis, Rato said at a seminar in Madrid.

“Credit markets are correcting, but slowly, we aren’t at a stage of normality," Rato said, adding that most countries should be able to cope with the financial conditions.

“It has an effect on the real economy which will be felt more in 2008, with greater intensity in the United States, less in other areas," he said.

Rato saw no quick fix for the global credit crunch triggered by defaults on the US subprime home loans to borrowers with poor credit histories.

Financial institutions have cut inter-bank lending to limit exposure to US subprime home loans that were sold around the world via packages of asset-backed securities.

Central banks have injected liquidity to compensate for the liquidity squeeze.?IMF still sees risks to growth on the downside given the strong state of the global economy, Rato said.

It was not yet clear, he said, whether the credit crisis represented a change in economic cycle or a temporary slowdown in growth.

A few more months will be needed to access the full impact on banks, companies and governments, he added.

“A lot will have to do with the length of the crisis, the longer it lasts, the bigger impact it will have," Rato said.

IMF has said it will cut economic growth forecasts for the US, euro zone and other regions when it releases its latest World Economic Outlook next month.

Spain, the euro zone’s fourth largest economy, is exposed to the credit crunch by its current account deficit which is the second largest in the world after that of the US.

“International financing is getting more complicated and our external deficit needs financing," Rato said.

In July, IMF revised upwards its Spanish gross domestic product (GDP) growth forecast for 2007 to 3.8% from 3.6%.

IMF left its 2008 estimate at 3.4%, one-10th of a percentage point above the Spanish government’s forecast of 3.3%.

Rato is leaving IMF and declined to comment on his future plans. Spanish media on Monday reported Rato was in talks to become vice-chairman of BBVA, Spain’s second biggest bank. REUTERS

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Published: 25 Sep 2007, 12:54 AM IST
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