‘Credit crisis will leave no one standing'

IMF chief Strauss-Kahn hints India not immune, to aftereffects, rejects 'decoupling' theory

MUMBAI: The ongoing global financial crisis will not be restricted to developed economies, and developing countries too will not be spared, International Monetary Fund managing director Dominique Strauss-Kahn said on Monday.

Delivering a lecture organised by the Reserve Bank of India, Strauss-Kahn said no region in the world “will escape unscratched” from the global financial credit crisis.

“Emerging market economies are not immune. So far, these markets have seen strong growth because of exports, but a reversal in commodity prices may worsen their growth forecast,” Kahn said.

Strauss-Kahn called the decoupling theory (which argues that emerging market growth may be immune to a US slowdown) “very misleading”.

“Linkages between the financial sector and the real sector and emerging and developed markets are much more complex. Before this crisis, these linkages were related to trade, but today, on top of trade we have financial risks, so the spillover is much more complex,” he said pointing out the that the increased interest rate differential between the US and India has meant new challenges for India, like liquidity management.

The IMF’s views are interesting, considering the RBI resisted the temptation to cut interest rates in its policy review last month, preferring instead to focus on domestic factors rather than the global turmoil.

In an audience that included the RBI governor YV Reddy, deputy governors and industry bigwigs like Uday Kotak of Kotak Mahindra Bank, Citibank India chief Sanjay Nayar and LIC chairman TS Vijayan, Strauss-Kahn said an economy as big as India cannot be immune to what happens globally.

“It is more difficult to say that India and China will stay aside from the US slowdown. We are in a globalised world and whether we like it or not, global problems require global solutions,” Strauss-Kahn who has handled the economy, finance and industry portfolios in the French government said.

Strauss-Kahn’s comments are interesting because it comes just a week after the IMF commended India for its sound macroeconomic policies.

Earlier, in his introductory remarks for the IMF chief, governor Reddy said that India did not contribute to global imbalances “but has a stake in the normalisation of the global economy.”

On January 29, the IMF projected a decline in global growth this calendar year to 4.1%, from the 4.9% expansion in 2007. The reduction in the growth forecast in US is the main reason given for this decline.

Strauss-Kahn said the US slowdown will be “significant” and will last for a “rather long period”.

Besides the US, the European economy is also at a high risk from the credit crisis, he said. “This crisis is about the ‘unknown unknowns’ and European banks are not as advanced as those in the US and have a lot of disclosers to make, because though they don’t have big exposures, they have complex products like CDOs.”

“The crisis,” he said, “will hit European banks very hard.”

Strauss-Kahn admitted that the IMF could have been more vocal about the crisis last year, but supported the US Federal Reserve’s decision to cut interest rates.

However, RBI governor YV Reddy was concerned about how the liquidity will be sucked out of the global markets once the injection has worked.

“We have to start thinking about it because it’s not going to be easy. There is going to be a socio-political context,” Reddy said, referring to the billions of dollars injected by global central banks to help banks tide over the credit crisis.

r_joel@dnaindia.net