Fallout from global financial crisis will be long lasting, warns IMF

The global credit crisis is not over, and its effects will be long lasting, the International Monetary Fund has warned.

The organisation's twice-yearly Global Financial Stability report warned that many of the lax lending practices of the past few years will have to change, and economic growth will be crimped by the current correction.

Adding to the gloom, Rodrigo Rato, the IMF's managing director, said yesterday the US will bear the brunt of the economic consequences of the crisis, with the bulk of the impact not being felt until next year.

Debt markets have convulsed after finally recognising the extent to which credit discipline has deteriorated in recent years, the IMF's report stated. "The potential consequences of this episode should not be underestimated, and the adjustment process is likely to be protracted. Credit conditions may not normalise soon, and some of the practices that have developed in the structured credit markets will have to change."

The practice of rolling together lots of different kinds of debt, including low quality US mortgage loans, and selling them on piecemeal in the global financial markets has diffused the responsibility for checking that the underlying loans are sound, the IMF said. The use of off-balance sheet funding vehicles has also made it harder to judge the creditworthiness of major banks.

But it cautioned against making knee-jerk changes to the regulation of the debt markets. Greater transparency is needed, it said, "however, given the volume and complexity of the information that could potentially be provided, and the cost of providing it, it will be important to carefully consider the appropriate amount and type of disclosure needed."

The most important financial institutions have enough capital to withstand the shock, it said, and global growth has been solid in 2006 and 2007, "though some slowdown could be expected".

Mr Rato, who is stepping down from the IMF next month, elaborated on the risks to growth on the sidelines of a banking conference in Madrid yesterday.

"It has an effect on the real economy which will be felt more in 2008, with greater intensity in the US, less in other areas," he said. "A lot will have to with the length of the crisis, the longer it lasts, the bigger impact it will have."

Meanwhile, a member of the Bank of England's Monetary Policy Committee said it was too early to judge the economic impact of the credit crunch and the run on Northern Rock in the UK.

In a speech to a business audience in northern England, Andrew Sentance said there will clearly be some impact on the balance of risks for growth and inflation.

"To inform our [interest rate] judgements, we will be monitoring closely any changes in the cost and availability of credit to businesses and households alongside all the other data relevant to the outlook for inflation," he said.