Europe Economy

Risk of US Contagion is Very High: IMF


The global economic outlook is worsening and the risk of contagion from a financial markets crisis that began in the United States is now very high, IMF chief Dominique Strauss-Kahn said on Monday.

At a news conference in Paris, he welcomed the overnight steps taken by the U.S. central bank and said the International Monetary Fund would be cutting its growth forecasts again soon.

He also said the European Central Bank and the U.S. Federal Reserve were managing the market liquidity troubles very well, and that the situation in currency markets, while tricky, did not in his view call for central bank intervention.

"Obviously the financial markets crisis which started in the United States is now more serious and even more global than it was a few weeks ago. The risks of contagion are very high," he said.

Regarding the U.S. central bank's latest decisions on interest rates and lending facilities and involvement in the JPMorgan takeover of Bear Stearns , he said: "I think I can just welcome the decisive and prompt measures taken by the U.S. Fed...What has been done by the Fed comes in due time, and the rest of which could be done by central banks will certainly be in line."

"The central banks, the Fed, the ECB, others, have in my opinion very well managed the question of the lack of liquidity. So there's no reason to believe that they won't be able to deal with the liquidity question in the coming weeks."

The Fed cut the discount rate to 3.25 percent on Sunday.

The yuan and yen looked weak, the euro overvalued, and the dollar somewhere in-between, said Strauss-Kahn, holding a news conference he held jointly with OECD chief Angel Gurria.

"The dollar is indeed starting to weaken, it's true, but the weakest currency is not the dollar," he said.

"The weakest currencies are Chinese renminbi and Japanese yen in part," he said.

"The whole monetary system is starting to become stretched now, with, on the strong side, the euro, and clearly on the weak side the Chinese and Japanese currencies, and between the two the dollar," he said.

"For a long time the dollar was in a situation where its downward movement was predictable. We are now in a situation that is more stretched and this more stretched situation is not a situation now in which it seems to me that central banks need to intervene," he said.

The current climate was not a problem for depositors.

"It's a problem for economic growth. We clearly face a situation in which the risks to economic growth are clearly more and more serious."

The IMF would be lowering its economic growth forecasts in the coming weeks, including its forecast for the United States, Europe and China, he said.

The OECD's Gurria said more public money might be needed to sort out the problems and more monetary easing might be needed, notably in the United States.

Both men said their institutions would be lowering their economic forecasts, in coming days in the OECD's case and the coming weeks in the IMF's case.