Joint public and private sector solutions to the underlying problem of US mortgage market dislocations will be needed to reestablish normal market conditions, former IMF head Rodrigo de Rato will argue in a speech in Madrid today.
While market indicators suggest conditions are improving, considerable dislocations remain in the long term money market, de Rato will suggest in the keynote speech at a seminar organized by the Institute of International Finance.
Markets appear to have regained composure after turbulence triggered by the sub-prime mortgage crisis – but risk aversion remains strong, de Rato will emphasise.
De Rato, who stepped down as IMF managing director in October last year, is now chairman of Criteria Caixa Corporation’s advisory board and a member of the international advisory board of Banco Santander.
He will use today’s speech to highlight the extent of counterparty risk aversion that continues to cause financial institutions to reduce exposure to each other.
This was again underlined on Friday when central banks in the US and in Europe launched a new coordinated assault to ease strains
in financial markets through support to interbank markets. These involve swaps to allow European authorities to provide more dollars to their banks.
The IIF is meanwhile expected to sound an upbeat note about a resilient Asia’s ability to continue strong growth despite a sharp slowdown in the US economy and growing signs of economic deceleration in Europe. Asian nations are maintaining strong export growth by diversifying target markets away from traditional reliance upon the US, it will argue.
At the same seminar, Richard Goulding, group chief risk officer of Standard Chartered Bank, will announce the findings of an IIF committee on market best practices.
This is expected to detail “tangible ways” to address financial market weaknesses and to rebuild market confidence through the adoption of best practices.
The IIF’s latest Asian Regional Economic Overview will report that economic activity in the leading emerging markets of Asia should hold up well despite deteriorating global conditions. Real GDP growth for the group is set to expand by around 8% this year, down moderately from more than 9% in 2006 and in 2007.
“Surging food prices risk undermining social stability and fuelling inflationary expectations, but inflation is likely to recede over the near term,” according to the IIF.