–Critical of US Housing System; Benefits The Rich Over The Rest

By Brai Odion-Esene

WASHINGTON (MNI) – The U.S. dollar will depreciate in value at a
moderate pace over the next five years, although not a rate that will
pose a threat to the economic recovery, an official with the
International Monetary Fund said Thursday.

The IMF believes that in five years time — based on the
fundamentals it sees — “we would expect that the dollar might
depreciate moderately,” David Robinson, deputy director of the IMF’s
Western Hemisphere Department, told reporters during a press conference
on the IMF’s preliminary findings of its review of the U.S economy, also
known as the Article IV consultation.

“I’m not going to put a very precise number on that,” he continued.
“There are large margins of error in this estimate, but by moderate we
mean moderate; it’s not huge.”

As for how this will impact the recovery, Robinson noted that in
recent months — primarily as a result to the sovereign debt crisis in
Europe — the dollar has appreciated “quite a lot” against the euro.

“That’s not helpful for the recovery at this stage, clearly, but
its not a deal-breaker for the recovery either,” he said.

While the IMF said the recovery in the U.S. has become increasingly
well established, the Federal Reserve has recently adopted a more
cautious outlook, predicting the pace of the recovery to be moderate for
some time.

Asked to comment on the differing outlooks, Robinson said while the
IMF remains confident in its forecasts, the downside risks to its
projections have increased.

“If the data were to continue being weak, then we would obviously
have to think about revising our forecasts,” he said. If those downside
risk where to come to pass, he continued, then there would be a case for
a smaller fiscal adjustment in 2011.

It would also impact the policies of the Fed, Robinson continued,
because if the economic outlook became “noticeably worse,” the central
bank could change the language in its monetary policy statement to
indicate that interest rates could be lower for longer.

“But as I said, we are not at that point yet. I am talking about
‘what-ifs,'” he said.

Robinson was also critical of the housing finance system in the
U.S., saying it “probably benefits the rich much more than the rest.” It
also not clear that it achieves its objectives, he added.

Robinson repeated the IMF’s view of the U.S. fiscal situation laid
out in the Article IV statement, one in which the organization sees a
less strong growth outlook over the medium-term than the Obama
administration.

“Correspondingly, we see over the medium-term … a greater need
for more fiscal measures than the authorities at present do,” he added.
In the short-run, however, it is important to begin fiscal consolidation
but without impeding the recovery.

Robinson was asked if the U.S. — with large levels of borrowing —
will continue to tap into the debt markets easily or will it face
tougher conditions from investors.

“The U.S.’s ability to place Treasury bills and bonds at this stage
is a major concern,” he said. While there is fairly strong demand for
U.S. Treasuries at this point — fueled by the eurozone’s struggles —
the concern comes when private consumption begins to pick up “and there
is true competition for savings.”

When that time comes, Robinson predicted, there will be pressure on
interest rates, “in particular from the amount of public debt that we
see needing to be placed going forward.”

That is why the IMF projects a rise in the yields on Treasuries
over the medium-term, he added, making it important to stabilize public
debt.

The situation is especially difficult for U.S. state and local
governments in the short-run, Robinson said, noting that next year they
will begin to lose the support provided by the stimulus package.

Looking further down the road, “there are some very large pension
and healthcare liabilities for state employees on the horizon,” he
warned, with the bottom-line estimate at $1 trillion-plus.

“A lot of work is going to have to be done at the state and local
levels to revamp their systems, to make them essentially solvent,”
Robinson said.

As for the financial system, the commercial real estate sector
remains the principal vulnerability for the U.S. banking sector, said
Charles Kramer, chief of the Western Hemisphere Department’s North
American Division — particularly for smaller banks.

Kramer said it is the IMF’s view that the wave of foreclosures from
that sector “has yet to crest,” and banks with significant exposure are
likely to face pressure this year and the next.

The problems are magnified, he said, because many of the creditors
in sector are either delinquent in their payments, or the collateral
posted against the loans is inadequate.

** Market News International Washington Bureau: 202-371-2121 **

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