IMF’s Lagarde Warns of Risk of ‘Lost Decade’
International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth.
“In our increasingly interconnected world, no country or region can go it alone,” Lagarde said in a speech to a forum in Beijing today. “There are dark clouds gathering in the global economy.” China and India echoed the call for cooperation in a separate statement.
Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said. European leaders are looking to China as a potential source of funds as a sovereign-debt crisis threatens to engulf Italy, the third-biggest economy in the euro area.
Asian stocks rose for the first day in three today as easing inflation in China left more room for officials to support economic growth. A 5.5 percent gain in consumer prices in October was the least in five months, a government report showed.
China and India said that the global economy is in a “critical phase,” in a statement after the fifth meeting in a so-called financial dialogue between the two nations, usually held each year. The comments were dated yesterday and posted on a Chinese government website today.
“In emerging markets, where growth is relatively stronger, there are clear signs of a slowing as developments in advanced economies begin to weigh on these countries,” the two nations said. “In the face of these challenges, both sides recognized that strengthening of international policy cooperation is needed at this juncture.”
The MSCI Asia Pacific Index rose 1.1 percent as of 5:13 p.m. in Tokyo.
“We are all caught in a higher debt trap,” Former Federal Reserve Chairman Paul Volcker said at an event in Singapore today, in response to a question on whether the U.S. has fallen into a liquidity trap like Japan. “That’s the problem with Greece, Spain, Italy, Portugal and Ireland. It’s not a very happy situation.”
In Italy, Prime Minister Silvio Berlusconi has offered to resign as his nation struggles with taming its debt burden and borrowing costs climb. Hong Kong Chief Executive Donald Tsang said this week that the world economy faces a 50 percent chance of a recession.
In Asia, policy makers need to respond nimbly should conditions worsen, Lagarde said today. They “can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central-bank swap lines,” she said. Lagarde cited high unemployment in advanced economies and economic and financial market declines that reinforce each other as concerns.
“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” Lagarde said in her prepared text. “Ultimately, we could face a lost decade of low growth and high unemployment.”
Japan’s so-called lost decade during the 1990s saw the economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.
In Asia, “countries need to prepare for any storm that might reach their shores,” Lagarde said. At the same time, a balancing act is required, because “some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions.”
Lagarde said plans by leaders of the euro-area economies and Group of 20 nations over the past month to increase a rescue package for Greece were a “step in the right direction” to resolving Europe’s debt crisis.
The enlarged European Financial Stability Facility should be able to start raising funds in December, she said.
European finance ministers meeting in Brussels this week pledged to roll out the bulked-up rescue fund next month after consulting investors and credit-rating companies over two options for translating the fund’s 440 billion euros ($607 billion) in guarantees into as much as 1 trillion euros of spending power.
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