IMF economist says worst of crisis to come

23 Nov 2008, 0303 hrs IST, REUTERS

ZURICH: The financial crisis that has engulfed many top banks is spiraling into a broader economic crisis that has yet to peak, International Monetary Fund's top

economist Olivier Blanchard told a Swiss newspaper on Saturday.

Blanchard said the crisis would continue for another year and called on governments to promote fiscal expansion and on central banks
to cut rates toward zero.

"The worst is yet to come," he was quoted as saying in Finanz und Wirtschaft as he noted how the banking sector's woes had started to spill over into the real economy
by hitting the carmaking industry.

"This is only the beginning," he added. "The risk exists that the data will get worse and worse, which would then lead to more pessimistic expectations and accelerate a fall in demand. It will take a long time before we go back to normal conditions."

Blanchard said the crisis should last for another year, but normal growth would return only in 2011. "For 2009 we (the IMF) forecast negative growth on average in the industrialized nations," he said. "In 2010 there should be a recovery and we should go back to normal in 2011."

Blanchard said governments have up until now not done enough to address the crisis and called for fiscal stimulus both in the United States and Europe.

"In normal times the IMF would argue that budget deficits must be reduced ... But we are not living in normal times. Demand has collapsed. This is why a broad fiscal expansion is needed," he said.

Blanchard said central banks should cut rates as much as possible to avert the risk of a "Great Depression" scenario.

"They have to lower interest rates and bring them as close to zero as possible," he said. "We have to use all the ammunition that we have in order to limit the collapse of demand."


Via:E.T