The meeting of the leaders of the financial world at the U.S. mountain resort Jackson Hole was marked by the fear that Europe, USA and other advanced countries could go back into recession after years of struggling with a financial crisis that has forced governments to pump trillions of dollars in their economies.
As to the prospects of new economic collapse, the heads of the world’s most influential central banks have stressed that they can’t stimulate growth just with money and the initiative of the efforts to prevent recession now falls to governments. Therefore, U.S. politicians must develop a credible plan to limit long-term debt, and Europeans need to find permanent solutions to the debt crisis, writes The Wall Street Journal.
Lagarde warned that the world economy has entered a new, dangerous phase
The new IMF Managing Director Christine Lagarde, in a rather pessimistic analysis of the economy, warned the world leaders that urgent action is needed to eliminate the threat of recession and a new financial crisis.
“We could see, without any effort the spreading of the weakness to the major economies and even a devastating liquidity crisis”, Lagarde warned, cited by The Telegraph.
To reduce risks, the head of the IMF requires a “substantial” recapitalization and mandatory of the European banks. The recapitalization would be primarily financed by private sources, said the official, adding that funding could also come from a European bailout fund. “The events of this summer show that we have entered a new phase, dangerous. The stakes are clear. The risk is have an already fragile economic recovery hampered, so we must act immediately”, said Lagarde, who urged world leaders to use the G20 summit in November to calm fears about the global economy. She warned the advanced economies that the return could be affected if monetary policy is tightened too soon.
“Simply put, macroeconomic policies should support growth”, said Lagarde.
IMF chief’s comments might cause a new wave of panic on markets, related to financial situation and stability of European banks.
Analysts are worried that the interbank credit market began to dry up in recent weeks because of concerns about banks’ exposure to the debt crisis.
Freezing interbank market was one of the first signs of financial crisis in 2008.
Fed will do everything it can to support the economy
U.S. Federal Reserve Chairman Ben Bernanke announced, during his much awaited speech at the annual symposium in Jackson Hole, that the institution he leads will do what it can to stimulate the economy in the short term and urged other policy makers to deal with challenges that do not fall under the control of the Fed, such as high unemployment, collapse of the housing market and increasing budget deficit.
Bernanke did not give information about what tools can the Fed use to stimulate the economy, although markets expected him to announce a third round of quantitative easing (QE3).
The head of U.S. central bank said, however, that Fed meeting officials on September 20 will be extended one day to deepen the discussions on the economy and the measures they could take. Some analysts saw in this decision the hope of a new incentive program such as QE.
“We will come eventually to QE3, but probably not in September, but they will come closer next month”, says one analyst quoted by Bloomberg.
U.S. economy grew by an annualized pace of 1% in the second quarter, after an advance of only 0.4% in the first three months. Unemployment stood at 9.1% in July, according to the government. Weak economic data have led some analysts to estimate a 50% chance that the U.S. economy will enter recession.
“The fundamental factors underlying growth in the U.S. do not seem to alter by the shocks of the last four years. Healing of the economy will take time and probably there will be obstacles in the road”, said Bernanke.
ECB chief defended euro zone
Jean-Claude Trichet, European Central Bank president – the only institution that currently supports countries with financing problems in the euro area – has defended the currency union stressing that the U.S. economy has a regional diversity similar to that of the euro zone and urged world leaders to restructure their economies in order to promote growth.