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IMF chief warns world economy risks 'downward spiral'

09 november 2011, 12:59
0
IMF chief Christine Lagarde. ©AFP
IMF chief Christine Lagarde. ©AFP
International Monetary Fund chief Christine Lagarde on Wednesday warned the world was at risk of plunging into "uncertainty and financial instability" and urged Asian economies to be on their guard, AFP reports.

Speaking at the International Finance Forum in Beijing, Lagarde said Asia was not immune to problems currently sweeping the eurozone, as she began a two-day visit to China likely to focus on the deepening debt crisis in Europe.

"If we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability," she said at the forum in Beijing.

It is unclear who Lagarde will meet in the Chinese capital, but talks are expected to touch on China's possible contribution to a bailout fund -- the European Financial Stability Facility -- to help the debt-laden eurozone.

European leaders have called on China, which has the world's largest foreign exchange reserves at $3.2 trillion, to invest in the fund.

The head of the fund, Klaus Regling, has travelled to Beijing for talks about a possible contribution, but China has so far made no firm commitment to provide financial assistance for the troubled eurozone.

Europe has been discussing with China and other investors how to structure a special purpose investment vehicle and is exploring the possibility of linking it to the IMF.

"We are all in it together and our fortune will rise or fall together," said Lagarde, fresh from a visit to Russia where she warned Moscow against complacency given the budget crises in eurozone states.

"Asia is not immune. Whether it is the trade channel or whether it is the financial sector which can operate as a crisis accelerator, Asia needs to be prepared."

Lagarde also called for a stronger Chinese currency "in real effective terms", adding to intense international pressure for a faster appreciation in the yuan.

The United States and Europe -- major buyers of Chinese products -- have accused Beijing of deliberately keeping its currency undervalued to give its exporters an unfair advantage, though Beijing has rejected the charges.

A move to help developed European countries out of the current crisis would be a hard sell for leaders of a country where millions of people still live in poverty, and inflation and housing costs are straining household budgets.

China has also been burned before on risky overseas investment. It bought stakes in investment bank Morgan Stanley and asset management firm Blackstone only to see values collapse in the 2008 global financial crisis.

The losses led to severe criticism of the investment choices made by the $400 billion sovereign wealth fund -- China Investment Corp (CIC) -- only a year after it was established in 2007.

At the weekend, a top official at CIC accused Europe of "indolence".

Jin Liqun, chairman of the board of supervisors of the fund, said in an interview with Al-Jazeera that Beijing would consider investing in Europe but any decision would be based on likely investment returns.

Lagarde is due to brief the press about her visit on Thursday.


By Sebastien Blanc

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