IMF Warns Against Bubbles Forming, Countries Still Need To Remove Toxic Assets

The International Monetary Fund (IMF) warned today that the difference in the rates of growth in different regions of the world poses significant challenges for governments, as developing countries are facing the risk that the surge in inflows lead to new asset bubbles. This at a time when many advanced economies continue to depend measures to support financial, monetary and tax rates.

The IMF says these unprecedented measures to support increased fears about sovereign debts, but warned that "a premature exit and inconsistent stimulus policies could weaken global growth and its recovery.

In its World Economic Outlook, the IMF recognizes that it will be difficult to design exit strategies. When private demand become sustainable, countries must take into account the concerns about debt levels, the bubbles in asset prices and exchange rate appreciation, Emerging economies to deal with the sharp increase in capital flows face a complex task and the response should depend on the circumstances, such as tightening fiscal policy or allowing currency appreciation.

However, the bank insists that increases in reserves or capital controls could be appropriate to deal with transient and at the same time significant changes. Given the increasing concerns about the levels of public debt, the Fund recommends that countries fully implement the fiscal stimulus this year, while drawing up plans viable fiscal sustainability.

On the monetary front, the Fund said that many central banks can keep interest rates low this year, given expectations of low inflation. The countries that recover more quickly will have to tighten earlier.

On financial front, the advanced countries and emerging economies most affected still have to address the restructuring of banks and removal of toxic assets. The authorities should remove the financial support and gradually advance reforms that will reduce the financial risk and make banking more efficient and resilient.