Financial thoughts

Global financial-market turmoil stemming from the U.S. subprime mortgage crisis may have yet to run its course, the International Monetary Fund's deputy chief said.

“We still see serious risks to global financial stability,'' Deputy Managing Director John Lipsky said in a speech that was delivered by Daniel Citrin, the IMF's deputy director for Asia Pacific, at a symposium in Tokyo today. Policy makers in Asia, where subprime losses have been “substantially lower than elsewhere,'' need to avoid complacency, he said.

Japanese Finance Minister Fukushiro Nukaga said growth in emerging markets is bolstering the global economy, which is going through a “difficult phase.'' Rising oil and food prices “are making monetary and macroeconomic policies more difficult,'' Nukaga said at the event.

Lipsky called on China to allow its currency to appreciate faster and said Asian governments should do more to encourage consumer spending. A stronger yuan would slow China's export growth, encourage imports and reduce the nation's record trade surpluses with the U.S. and Europe.

He said the current financial turmoil has narrowed the U.S. current account deficit, though that didn't mark the end of global imbalances, or lopsided trade flows.

U.S. Current Account

The deficit in the U.S. current account, the broadest measure of trade, shrank in 2007 for the first time since 2001 easy fast cash. The shortfall in the fourth quarter of last year was $172.9 billion, the smallest in three years.

“We therefore see a risk that the latest reduction in the U.S. current account deficit does not mark the end of large imbalances, but rather a shift to new ones,'' Lipsky said. “In particular, some economies with flexible exchange rates — like the euro area — are now faced with a currency that is on the strong side relative to medium-term fundamentals.''

The dollar is “at — or slightly stronger than — its medium-term equilibrium on a broad trade-weighted and inflation- adjusted basis,'' he said.

The IMF official criticized Asian countries for failing to move quickly enough to boost domestic demand and increase currency flexibility. “As a result, the drop in the U.S. current deficit has not been mirrored to date by a decline in Asian surpluses,'' Lipsky said in the speech.

“Failure to produce sustained stronger domestic demand growth in the major surplus economies could result in both slower global growth and sustained imbalances,'' he said. “That eventually would tend to undermine the confidence of both investors and consumers, and potentially heighten economic and financial volatility.''

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