IMF Urges Advanced, Emerging Govts To Coordinate On Crisis

By Tom Barkley

Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Policymakers from advanced and emerging economies must work closely together to halt the spread of the global crisis, the International Monetary Fund said Thursday.

In unveiling a new index to track financial stress in emerging markets as part of its World Economic Outlook report, the IMF warned that the sharp drop-off in capital flows from advanced to emerging markets could trigger "major negative spillovers" for the whole world.

"A coordinated policy response by advanced and emerging economies is required, since reducing individual country vulnerabilities alone cannot insulate emerging economies from a major financial shock in advanced economies," the fund said.

The full WEO report, including the IMF's latest economic forecasts, will be released April 22 ahead of the spring meetings. Last month, the fund slashed its outlook for the world economy, with the biggest downgrades affecting emerging and developing economies that have been increasingly caught up in the slump.

The world economy is expected to contract for the first time in 60 years in 2009, with negative growth of between 0.5% and 1%, according to last month's estimates. Advanced economies are expected to contract 3% to 3.5% this year, while emerging and developing economies are projected to eke out an expansion of between 1.5% and 2.5%.

However, by the fourth quarter of 2008, strains had become elevated in financial systems everywhere across the emerging world, according to Thursday's study.

The index, which tracks equity markets, currencies and banking sector metrics across 18 emerging economies going back to 1997, found that stress levels had topped those of the Asian crisis of the late 1990s by the end of last year.

The emerging market index builds on a similar measure for advanced economies introduced by the fund last October, which through February continued to show the unprecedented breadth and intensity of the crisis.

"The current crisis in advanced economies is much more severe than any since 1980, affecting all segments of the financial system in all major regions,"

However, he cautioned that the shift has been from "extremely high" to "very high" stress.

"We don't see any normalization yet, but the direction is certainly moving toward more stability," said Danninger.

IMF chief economist Olivier Blanchard said that while export markets in emerging countries will recover along when advanced economy growth resumes, it could take a lot longer for capital flows to return.

"Even, I think, if the banking system is slowly repaired in advanced countries, it is going to take quite a while until we see a return of capital outflows" into emerging markets," Blanchard said at the briefing.

The study found that given the global nature of the financial system, the turmoil quickly gets transferred from advanced to emerging economies on nearly a one-to-one basis.

Correlations vary significantly from country to country, depending in large part on how closely linked the financial sector is to the global system. The heavy banking presence of Western European institutions in emerging Europe are a big reason for the ongoing turbulence in that region, for example, according to the study.

Given the spillover effects, advanced countries "should recognize the adverse feedback that will come from second-round effects caused by the decline of capital flows to emerging economies," the report said.

The IMF recommends that advanced countries work to stabilize their own financial systems and provide support to banks - especially those with emerging market operations - without discouraging overseas lending. Better coordination between supervisors would also help, it said, along with increasing official access to funding through measures such as the Federal Reserve and European Central Bank swap lines.

Policymakers in emerging economies should protect financial systems and take countercyclical measures when possible, the fund said.

While strong current account and fiscal balances won't do much to protect emerging markets from the financial contagion, such policies will help reduce the impact on the real economy and better prepare the countries for financial stability once the turmoil subsides, the fund said.

-By Tom Barkley, Dow Jones Newswires; 202-862-9275; tom.barkley@dowjones.com

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(END) Dow Jones Newswires

April 16, 2009 10:46 ET (14:46 GMT)

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