Governments need to take additional coordinated action to revive world financial markets and get credit flowing again, the chief of the International Monetary Fund (IMF) has said, warning that the global economic outlook is continuing to deteriorate.
Speaking at a conference here Monday that marked the 50th anniversary of Spain's IMF membership, Managing Director Dominique Strauss-Kahn said action is needed on three fronts to prevent the current recession from turning into a global depression.
These are: coordinated government intervention in financial markets to get credit flowing and support bank recapitalization, fiscal measures to offset the abrupt fall in private demand, and liquidity support for emerging economies to reduce the adverse effects of the widespread capital outflows triggered by the financial crisis.
Strauss-Kahn said governments around the world have endorsed this agenda, most recently at the November meeting of the Group of20 (G20) industrialized and emerging economies in Washington.
"Many have begun to implement it. But the actions taken so far are not enough. We need more," he said.
The IMF said in its latest forecast that advanced economies are expected to contract by a quarter percent on an annual basis in 2009, marking the first annual contraction in the post-war period for this group of countries.
However, IMF First Deputy Managing Director John Lipsky has said that the IMF is likely to revise its global forecast downward next month.
Government intervention in the financial markets should be clear, comprehensive, and cooperative between countries, Strauss-Kahn said.
"Government action needs to have a clear objective so that effective oversight of how public money is used is possible," he said.
To be comprehensive, national plans must contain guarantees to depositors and assurances to creditors that are sufficient to ensure that markets function.
The IMF said its experience with past crises underlines that both recapitalization and loss recognition are key, therefore calling for plans that provide liquidity, support bank recapitalization, encourage banks to recognize their losses and promote the removal of distressed assets from their balance sheets.
The IMF called for coordination both at the global level and at the regional level, saying the comprehensive program that the G20 has initiated will help further promote global coordination.
At the regional level, the European Union on Friday adopted a EU-wide economic stimulus package worth 200 billion euros (264 billion U.S. dollars) to coordinate national efforts within the bloc to support a sluggish economy hit by the financial crisis.
However, Strauss-Kahn sounded cautious over the effectiveness of the actions, saying he was "somewhat worried" about these plans.
"A lot has been announced but I sincerely believe that the follow up doesn't go fast enough," he said.
The fund also views supporting aggregate demand as another priority at a time of falling consumer demand.
"We are facing an unprecedented decline in output, we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures, and we anticipate that the negative growth effects will last for some time," said Strauss-Kahn.
The IMF chief called for "stimulus measures that are large and diversified, and that will last longer than one or two quarters."
He recognized, though, that not all countries would have the capacity for a fiscal stimulus.
He said maximizing the multiplier effect of different fiscal measures are key to the effective use of the fiscal stimulus.