–IMF WEO Update: Global Growth Revised Up 0.2 pt to 4.4%, 5.0% 2010
–2011 US GDP Estimate Revised Up 0.7 pt To 3.0% Vs October Est.
–Monetary Accommodation Needs To Continue In Advanced Economies
–IMF GSFR: Increase Size of European Financial Stability Facility
–IMF WEO Raises 2011 Oil Price Projection to $90/Bbl vs $79 Previous

The IMF report noted that with emerging markets now accounting for
almost 40% of global consumption — and more than two-thirds of global
growth — a slowdown in these economies would deal a serious blow to the
global recovery — and to the rebalancing that needs to take place.

The report went on to note that for some countries, “allowing the
currency to appreciate would help combat overheating pressures and
facilitate a healthy rebalancing from external to domestic demand.”

And in those countries where the currency is above levels
consistent with medium-term fundamentals, the IMF said fiscal adjustment
can help lower interest rates and restrain domestic demand.

“Macroeconomic policy responses may, however, need to be
complemented by strengthened macroprudential measures (for example,
higher loan-to-value ratios, funding composition restrictions) and, in
some cases, capital controls,” the report concluded.

The IMF’s Global Financial Stability Report, released alongside the
updated WEO, sought to emphasize the warning that more must still be
done to in fixing the global financial system.

“Nearly four years after the onset of the largest financial crisis
since the Great Depression, global financial stability is still not
assured and significant policy challenges remain to be addressed,” the
report said. “Balance sheet restructuring is incomplete and proceeding
slowly, and leverage is still high.”

The dual weight of funding pressures and continued banking sector
vulnerabilities leaves financial systems fragile and highly vulnerable
to deterioration in market sentiment, the report said. In addition,
continued high levels of private debt in some countries are likely to
dampen both private sector demand for credit and banks’ willingness to
lend, weighing on the economic recovery.

“The time purchased with the extraordinary support measures of the
past few years is running out,” the IMF warned, “(l)ow policy interest
rates that are close to the zero bound are likely to have a diminishing
effect over time.”

Furthermore, the idea of fiscal stimulus and further government
support of the financial sector are also becoming increasingly
unpalatable politically. Instead future solutions, the report said,
“need to address sovereign risk and financial fragilities in a holistic
and comprehensive fashion.”

In Europe, for instance, the GFSR called for the effective size of
the European Financial Stability Facility to be increased and that it
should have a more flexible mandate.

The reasoning behind this suggestion is that, “For countries where
the banking system represents a large proportion of the economy, it is
now even more essential to ensure access to sufficient funds, going
beyond national backstops whenever necessary.”

The report also suggested that Euro area-wide resolution mechanisms
need to be deployed and strengthened as needed, arguing that introducing
a pan- European bank resolution framework with an EU-wide fiscal
backstop would help decouple sovereign and banking risks.

On the monetary policy side, the IMF said the European Central Bank
will need to continue to supply liquidity to banks that need it and keep
its Securities Markets Program active, while at the same time
acknowledging that this is a temporary set of measures “and will not
solve the underlying problems.”

In the United States, however, more still needs to be done to
address the headwinds from the still damaged housing market.

The report stressed the importance of finding ways to mitigate the
negative macro-financial linkages from the large “shadow inventory” of
houses for sale that is likely to dampen house prices for some time to
come and exacerbate negative home equity problems.

An overhaul of the U.S. housing finance system is also needed, the
report added, including the role of the mortgage-related,
government-sponsored enterprises. Reform could come in the form of
either privatization or converting them to public utilities with an
explicit (and explicitly funded) guarantee.

“The authorities should not delay efforts to create an action plan
for the future,” the IMF concluded.

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

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