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  • Oct 3rd, 2009
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The International Monetary Fund and the World Bank warned on Friday that the global economic recovery might falter as complacent policymakers lost their will to cooperate. "The danger today is no longer, fortunately, one of a collapsing world economy," World Bank President Robert Zoellick told a news conference. The danger today is one of complacency.

-- Both warn of risk of "complacency" among policymakers

-- Want common principles to unwind crisis measures

-- Both IMF, World Bank ask for more resources

"There will be a natural tendency to return to business as usual, and it will become harder to convince countries to cooperate in order to address many of the problems that led to this crisis, that put millions of livelihoods of people at risk." IMF Managing Director Dominique Strauss-Kahn, speaking as top financial officials from across the globe arrived in Istanbul for semi-annual IMF and World Bank meetings, also used the word "complacency" in describing the risk of policy errors.

He said governments might be tempted too early to unwind expensive rescue measures for their economies, such as fiscal stimulus programmes and injections of huge amounts of money into their banking systems. "My worry is governments say, 'That's it, we're out of the crisis, it's time to go back to normal' - that would be the real error and it's one of the risks we must be sure to ward off."

The warnings by both the world's premier multilateral lending organisations reflected concern that governments might not make the difficult policy choices and compromises needed to tackle the root causes of the financial crisis. The IMF declared on Thursday a global recovery had begun, raising its forecast for growth next year to 3.1 percent from the 2.5 percent that it had projected in July.

Last month, the Group of 20 major nations agreed in principle to cooperate in reducing the trade imbalances that contributed to the financial crisis, and to set tougher rules for the banking system. But there are signs that as the recovery of the global financial system reduces the urgency of such reforms, the political will to press them is fading among many governments.

IMF chief economist Olivier Blanchard said on Thursday that rebalancing the world economy would not be possible without the appreciation of some Asian currencies. But China is still resisting pressure to appreciate its tightly controlled yuan, which could help to cut its trade surplus.

Some European, particularly French officials are complaining that the euro is too strong, even though the euro zone's trade surplus ballooned to 12.6 billion euros in July - and a stronger currency could reduce that imbalance with the rest of the world. Reform of the banking sector has been held up by disputes among governments over issues such as how to regulate bankers' bonuses and how to monitor system-wide risks. Major financial centres fear losing business to other centres.

"I am very concerned that as financial markets recover, complacency is setting in. Also, a clear vision for the future of financial system regulation is needed urgently to reduce uncertainty and boost confidence," Strauss-Kahn said.

Perhaps most worryingly, central banks and governments in some countries have started talking about winding down monetary and fiscal stimulus steps well before others. This could leave some countries carrying heavy fiscal burdens and prompt destabilising fund flows between economies.

The European Central bank urged the European Union on Thursday to start withdrawing fiscal stimulus in 2011 at the latest, but the region's finance ministers were noncommittal. The Norwegian central bank said on Wednesday that its interest rates might soon start rising.

"Each nation's own pace of economic recovery and financial sector repair, as well as their available policy space, will matter," Strauss-Kahn said. "However, I do consider it important for countries to adopt common principles for the unwinding of crisis-related support measures."

The IMF has expanded its role of providing policy advice and financing to governments during the crisis. Last month, for example, G20 leaders requested the IMF to investigate ways the financial markets could pay for the effects of the economic crisis, possibly through a tax.

Asked on Friday about the idea of placing a "Tobin tax" on financial transactions to curb excessive risk-taking, Strauss-Kahn said a "simplistic" tax would not be a good idea. "I don't think that the very simplistic idea of just putting a tax on transactions will work; for many technical reasons I think it's very difficult to implement," he said.

But he said the idea of having the financial sector bear more of the burden of insuring against systemic risks was worth further study. Both Strauss-Kahn and Zoellick called on members to increase financial resources provided to the two institutions, to ensure they could deliver sufficient financing to countries in need. Strauss-Kahn said the IMF, whose resources were boosted by $500 billion in April, needed more funds so it could play a credible role as a global lender of resort. Zoellick said the World Bank's finances would become strained as of next year if it continued to lend at current record levels.

Copyright Reuters, 2009

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