De Rato: expect another crisis
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Emerging Markets

De Rato: expect another crisis

Fund managing director warns against complacency

Emerging market debt crises have not gone away, and the good times will not roll for ever, IMF managing director Rodrigo de Rato warned yesterday.


“At the moment, times are good in financial markets. But financial crises are not like the dinosaurs: they have not disappeared form the face of the earth,” de Rato stressed, injecting a starkly realistic note in to the annual meetings.


His warning was echoed yesterday by financial sector leaders. It would be “wildly naive” to assume that economic and financial buoyancy “can continue indefinitely” and crises are bound to recur, David Beers, global head of sovereign ratings for ratings agency Standard & Poors told Emerging Markets. S&P has been warning against this “complacency” for some time, he said.


Citibank vice president William Rhodes also warned that “there are many clouds” on the economic and financial horizon, and that markets are not fully differentiating against risk, especially in emerging markets.


Former Bank of Israel governor Jacob Frenkel added his voice to the chorus, saying that, while global conditions remain strong, “trees do not grow to the sky”. De Rato also hit out at creditor nations that load borrowing countries with “unsustainable” levels of debt. He did not name names, but market sources told Emerging Markets that Chinese official loans to Africa, and India’s costly export credits, could be in de Rato’s sights. So could countries that have not signed on to Paris Club debt rescheduling for the poorest countries.


“The time to prepare for [financial] crises is not when they are already knocking at our door, but now,” de Rato said in his opening address to governors on Tuesday morning. “The best defence against financial and economic crisis is good policies at home. Emerging markets all over the world - in Eastern Europe, Latin America and in Asia - know this, and many have been acting to reduce their vulnerability,” he said.


“Some could go further, for example by reducing public debt, strengthening financial systems and enhancing the flexibility of their economies,” he suggested. The IMF is gearing up for possible future problems by sharpening its range of financial instruments, including the need to design new facilities that help to ward off potential country crises, de Rato said. One of these is a “reserve augmentation line” that would allow borrowers to thicken their reserves cushion against possible balance of payments crises.


S&P’s David Beers debunked the idea that “the IMF is redundant” because it has not been called on to provide financing to emerging markets for some time, which he says is current among some financiers. “We expect some emerging markets will need to approach the IMF for funds again in the future,” he told Emerging Markets.


The global economic cycle “is turning” Beers said. Commodity prices are beginning to decline. There may not be “huge vulnerablities” on the horizon immediately for emerging markets, but “governments are managed by human bengs and they make mistakes,” he said. “Crises, when they blow up can blow up very quickly.”


Sovereign credit upgrades are still running ahead of downgrades, but there have been some warnings signs recently, Beers noted. Hungary and Iceland are two that have suffered a downturn in market perceptions recently, and the sudden correction in emerging equity markets in June this year was another possible portent of how quickly sentiment toward emerging markets can change, he added.


William Thomson, senior advisor to fund managers Franklin Templeton International, told Emerging Markets: “We should not be lulled into complacency by the serendipity and success we have seen here” at the annual meetings. “It is the unexpected that disturbs the status quo,” added Thomson, a former vice president of the Asian Development Bank.

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