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F&C reacts to IMF Global Stability report

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F&C Investments says the advice given by the International Monetary Fund’s (IMF) Global Financial Stability report is tinged with irony given that the current crisis has parts of its roots in the IMF’s previous policies.

Paul Niven, head of asset allocation at F&C Investments, said: “While the IMF report is both timely and instructive, those with a long memory will no doubt find some irony in the advice being given by the IMF to resolve the current crisis.

“Back in the 1990s the IMF encouraged predominantly Asian authorities to hike local interest rates and cut government spending in order to boost confidence from investors and regain access to overseas lending.

“While there are numerous differences between the Asian crisis of the 1990s and the current credit crisis both were borne out of reckless lending leading to a collapsing asset bubble (and currencies) but the US has been adopting rather different set of solutions to domestic problems through aggressive rate cuts, provision of liquidity and fiscal expansion. Not the IMF prescribed medicine of a decade ago.

“In addition, the IMF saw the Asian crisis as occurring, in part, from explicit or implicit government guarantees which contributed to reckless lending practices. This time, such guarantees are being used as part of the solution (despite the fact that they were also part of the initial problem).

“The real irony, however, is that the current crisis, arguably has at least part of its roots in the IMF policies of a decade ago which led to many developing economies swearing that they would never again go cap in hand to the IMF and be beholden to external parties in the time of a crisis. This determination to build huge foreign reserves in Asian economies led, in part, to depressed interest rates in the US and fuelled reckless mortgage lending there.

“While the IMF will not have a direct hand in solving this particular crisis, the policy response being seen in the US, and elsewhere, today, will have broad and longstanding implications. The seeds for the next bubble, boom and subsequent bust may well be being sown amid the current gloom.”



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