The IMF called for "decisive policy action" to strengthen the global financial system, buffeted by fallout from the subprime crisis, noting that authorities worldwide must also "think the unthinkable" so that they can better anticipate and react to potential global economic risks.
"By now, there is little doubt that risks of further escalation of this crisis are rising and decisive policy action will be required to put the global financial system and global economy on a firmer footing," said John Lipsky, First Deputy Managing Director of the IMF.
Though advanced economies are taking steps in the right direction, integration of financial markets globally implies more rapid and potent spillovers to other economies, Lipsky warned. Policy actions worldwide, so far, "may not prove to be adequate" to deal with the "low probability but high impact events" that may materialize and undermine global financial stability. "Policymakers as a matter of course need to `think the unthinkable,' and to consider how they would plan to react if contingencies arise. The need to prepare systematically for potential risks has been demonstrated amply during the past few months."
Lipsky pointed to the potential for a "global financial decelerator" that could amplify the impact of financial turmoil on the real economy. "A downward credit spiral, driven by rising defaults or margin calls that forces asset sales even as the value of collateral deteriorates could produce new rounds of deleveraging and asset price deflation," he explained.
Full speech Lipsky
IMF Survey
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