Downturn will only end when 'banks are fixed'

Elizabeth Judge
March 23, 2009 Times Online

The recession gripping the world will not end until the banks are cleaned up, the International Monetary Fund (IMF) said today.

In the latest in a series of a bleak assessments, Dominique Strauss-Kahn, head of the IMF, said that bailouts may be politically unpopular but the banking sector needs to be overhauled if the economy is to recover and businesses and households are to function normally.
"You can put in as much stimulus as you want. It will just melt in the sun as snow if, at the same time, you are not able to have a generally smaller financial sector than before but a healthy financial sector at work," he said. The global economic situation remained "bluntly dire" and was "extremely worrying and difficult," he said. Speaking at a meeting of the International Labour Organisation (ILO), he said that the economic crisis would push millions into poverty and unemployment and could lead to social unrest and even war. His pessimistic comments are in sharp contrast to those of Ben Bernanke, the Federal Reserve Chairman, who last week forecast that America's recession will end "probably this year". Mr Bernanke said he had seen the first "green shoots" of recovery and that the prospect of America entering its first depression in seven decades had been averted. However, he stressed that a recovery would not take root unless banks could be persuaded to lend more freely.

Mr Strauss-Kahn's comments came as the US Government stepped up efforts to stablise the banking sector. It announced today the launch of a $500 billion (£343 billion) investment programme which will use public and private finance to create a fund that will buy the so-called "toxic assets" that are preventing banks from providing more liquidity to the lending markets. Timothy Geithner, the US Treasury Secretary, outlined details of the fund in a piece in the Wall Street Journal. The IMF has already said that it expects global growth to slow below zero this year for the first time since the Second World War. It had previously forecast growth of 2.2 per cent. Mr Strauss-Kahn said the IMF would shortly officially update its economic forecasts, with the world economy set to contract by between 0.5 and 1.0 per cent this year. Global unemployment is rising towards the 50 million mark.

Developed countries' economies would shrink by a post-war record of about 3 per cent, he said. Mr Strauss-Kahn said that stimulus packages around the world were running at about 1.6 per cent to 1.7 per cent of world gross domestic product, close to the two per cent he had called for.
He also called on emerging countries to ensure that they restored confidence so as to attract private capital.