Advanced economies are already in a depression and the financial crisis could worsen unless the banking system is fixed, IMF Managing Director Dominique Strauss-Kahn said.
“The worst cannot be ruled out,” Strauss-Kahn said yesterday in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”
Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages worldwide won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said.
“All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector,” he said. “And today it’s not done.”
The US Senate is due to vote early this week on an economic stimulus package totaling at least US$780 billion that US President Barack Obama said is needed to prevent the economy from sinking into a deeper recession.
The US plan is the right size and the “correct” mix of measures, Strauss-Kahn said.
The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of the rescue plan to be unveiled by US Treasury Secretary Timothy Geithner this week, sources familiar with the matter said.
Governments should be ready for “full-fledged” intervention, acting quickly to sell or wind-up insolvent lenders, Strauss-Kahn said. While the European Central Bank could have more room to cut interest rates, that may not be as important as bank restructuring, he said.
In Asia, where nations from China to Singapore and India have pledged more than US$685 billion in fiscal stimulus, “there’s still room for bigger stimulus packages,” the official said.
Developing Asia will probably expand 5.5 percent this year, the slowest pace since 1998, the IMF said in last month’s update of its World Economic Outlook report. The region may expand 6.9 percent next year, the fund forecasts.