The risk of a disorderly adjustment of global economic imbalances has increased after the turmoil in credit markets, Rodrigo Rato, managing director of the International Monetary Fund, on Monday said.
In an apparent U-turn, the outgoing IMF chief also backtracked on earlier statements to the Financial Times in which he said the dollar was “undervalued”. Mr Rato said the IMF’s official position, based on staff analysis of medium-term equilibrium exchange rates, was that the dollar was still “overvalued”. “We still see room for further depreciation” over the medium term, he said.
“There is no question that if financial risks have increased and the pricing of risk has also increased, the financing of global imbalances could – I underline could – become tighter,” he told reporters ahead of the IMF’s annual meeting this weekend.
Mr Rato argued that the increased vulnerability was due to financial conditions rather than the underlying evolution of imbalances, which he said had “not got worse”. The IMF managing director said the US was slowing its external deficit but “not to the extent we would like to see”.
He said increased investment in the oil producing countries was helpful but added: “We still see that the rebalancing of demand in China has not occurred.”
He also warned that growth in Europe and Japan – which picked up relative to US growth over the past year, helping to stabilise the huge US current account deficit – would probably slow because of the credit squeeze.
Mr Rato said the world’s big economies needed to step up their strategies to reduce vulnerability to a disorderly adjustment of imbalances, that could lead, for instance, to a sharp fall in the dollar with an accompanying rise in risk premiums and interest rates on US assets.
He urged them to implement the agenda laid out by the IMF in multilateral consultations on global imbalances, which highlights the need for more public and private savings in the US, structural reforms in the eurozone and Japan, and greater currency flexibility in China and other big emerging markets.
Mr Rato said the impact of the decline in the US dollar on the US deficit would be limited. He added that while the IMF was forecasting a reduction in the deficit next year, it would not be a substantial reduction.
He claimed the same analysis used by the IMF to estimate the dollar’s valuation suggested that the euro was very near its equilibrium rate. Mr Rato largely endorsed the US position that the value of the dollar, euro and yen were appropriately determined in deep and liquid global markets.
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