IMF urges ‘clear, permanent solution’
Lesley Wroughton, Reuters
Province
WASHINGTON — The bottom of the U.S. housing downturn is not yet visible, while rising inflation is making it tougher to set monetary policy to keep the lid on prices without imperilling financial stability, the International Monetary Fund said yesterday.
“With delinquencies and foreclosures rising sharply and house prices continuing to fall, a bottom for the housing market is not yet visible and the credit deterioration is spreading to even prime mortgage loans,” said Jaime Caruana, director of the IMF’s monetary and capital-markets department.
“We consider this market is still at the centre of this turmoil and some of the valuations still depend on where this housing market finds a bottom,” he said.
Still, Caruana said falling house prices may make homes more affordable, which could eventually stabilize the U.S. housing market.
The IMF said global financial markets were still under immense pressure, with U.S. bank losses from the subprime mortgage crisis exceeding the amount of capital they are able to raise and lending conditions tightening even more.
“Global financial markets continue to be fragile and indicators of systemic risk remain elevated,” the IMF said in an update of its semiannual Global Financial Stability report.
“With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained,” it added.
The IMF, which estimated in April that losses in U.S. assets due to the fallout from the subprime crisis could reach $1 trillion, said it had no reason to adjust that figure.
The IMF called for “a clear and permanent solution” to deal with problems and oversight lapses at U.S. mortgage lenders and financiers, including Fannie Mae and Freddie Mac .
It said house prices were also softening in other advanced markets including Spain, Ireland and Britain and there were rising concerns over future loan losses in the mortgage, construction and commercial property areas.
Jan Brockmeijer, deputy division chief, said it was tougher to evaluate the exposure of European banks to the crisis in U.S. subprime mortgages — extended to borrowers with poor or spotty credit histories, many of whom became delinquent on loan payments — because they are slower to disclose losses than their U.S. counterparts.
“Their disclosures are less rapid so information for 2008 is more patchy and less clear to make categoric judgment on that, but as the crisis is unfolding and becoming broader, the impact will be felt more elsewhere,” Brockmeijer said.
The IMF said emerging markets were weathering the financial and credit-market turmoil, but investors were closely watching some countries’ policies to combat rising inflation.
Caruana said it was important that emerging markets properly deal with inflation.
“If they don’t do it promptly they will have to do it later, and perhaps more intensely later, but also we think that financial markets will discriminate among those countries that do not take the proper measures,” he said.
“If inflationary expectations become entrenched, not only might sharper tightening of monetary conditions be necessary, but financial markets and flows may also be sensitive to situations in which policies are perceived to be “behind the curve,” he added.
Caruana said financial market disruptions still need to be dealt with on a case-by-case basis and there was no iron-clad rule book on how they should be handled amid a wider global economic slowdown.
The report called for prompt and transparent government responses to relieve uncertainties in global markets.
© The Vancouver Province 2008
