World Economic News
IMF Director Warns of Financial Crisis
In a speech April 4 at the Harvard Center of European Studies, International Monetary Fund Director Rodrigo de Rato warned of "global imbalances" which, if they unwound quickly and chaotically, could trigger financial crises and a global recession. Many news accounts left out these statements, reporting instead some pabulum he uttered about global growth, and his proposals for IMF reform measures to bring in Asian countries. The warning was serious, despite the obsessive desire of many to ignore it.
"There are two obvious ways in which a disorderly adjustment of global imbalances could happen," de Rato said. "One would be an abrupt fall in the rate of consumption growth in the United States.... In this scenario, there would be a contraction of global demand, and possibly a global recession.
"Another possibility is that adjustment could be forced by financial markets. In this scenario, investors might become unwilling to hold increasing amounts of U.S. financial assets at current exchange rates and interest rates. This would lead to a depreciation of the U.S. dollar and increases in U.S. interest rates, which in turn would cause U.S. domestic demand to contract. Again, if this happened abruptly, it could cause a severe downturn, as well as global financial market disruptions."
The most visible problem, de Rato said, was the large U.S. current account deficit. Should financial markets force an adjustment, it could send the dollar sliding and push up U.S. interest rates. He specifically mentioned a bust in U.S. housing market as a trigger.
Some policy-makers, he added, believe global imbalances can either persist indefinitely or dissipate over time. "I find these views optimistic to the point of willful blindness," de Rato said. "I do not believe that the risk of a disorderly adjustment in the near future is high, but it is increasing as imbalances continue.
"A disorderly adjustment of global imbalances could be produced not only by inaction, but by unbalanced actions," he warned, also noting that to some countries there was a political cost if they acted to rectify the imbalances.
Banker Warns of South American Market Crash
Bill Rhodes, vice chairman of the Institute of International Finance, speaking about the potential for an Ibero-American market crash, is quoted in the Financial times April 5 cautioning: "We are in a situation similar to that which existed in the spring of 1997, when threats existed to market stability and a lot of people didn't want to see it. I am not predicting a new Asia crisis but it is interesting to see the similarities that are present."
Locust Swarms Leave Branches Bare: AT&T/Alcatel Merger
Dire warnings about the pending merger between AT&T and Alcatel appeared April 3 in the Financial times, Wall Street Journal, and wire stories. Most prominent in much of the coverage, were the job cuts that the merger would bring, thus the "efficiency" of such a large merger. In this case, the figure was 88,000, the number of workers who would be "efficientized" out of a job. The present AT&T, you may remember, is itself the product of a recent merger with Southwestern Bell Corp. (SBC), one which involved a job cut figure of similar proportions.
Also announced April 3, a group of five hedge funds are swarming around VNU, a Dutch media and entertainment company. The company is being accused of selling itself too cheaply to the group, which includes the European firm AlpInvest Partners, and U.S. firms Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts, and Thomas H. Lee Partners. The Financial Times has a similar list of criminals, each of whom has put together a fund of over $10 billion, led by Texas Pacific Group, which has raised a record $14 billion for a fund.