Tuesday, October 14, 2008

Bank stresses rising in emerging markets: IMF chief

Signs of stress are growing on banking systems in many emerging and developing economies, the head of the International Monetary Fund said on Sunday.

IMF Managing Director Dominique Strauss-Kahn warned finance and development ministers that the more severe and protracted the financial crisis becomes, the more emerging and developing countries will be affected.

Already, stock markets in emerging economies have declined as investors flee riskier assets and businesses find credit harder to come by.

The IMF and World Bank meetings in Washington turned to development issues and poverty on Sunday but worries about the global credit crunch remained front and center. Many developing countries worry that major economies, preoccupied with the financial crisis, will slow aid.

Banks are important to fund projects in the developing world and with tightening credit, resources will become stretched.

"The fallout for most banking systems in emerging and developing economies has been limited so far. But signs of stress are growing," Strauss-Kahn told the World Bank and IMF development committee.

Strauss-Kahn flagged dangers in Eastern Europe, where domestic banks have built up large negative net foreign positions through foreign parent banks, which are vulnerable to market sentiment because a large part of their funding is from wholesale markets.

Also, banks have become increasingly exposed to struggling real estate markets. They have not experienced a significant increase in loan losses so far, but have increased provisions for bad loans and may be forced to reduce credit growth if asset quality deteriorates sharply, he said.

The risk of such a scenario has risen, for instance, in the Baltics, where house prices and credit growth have fallen, Strauss-Kahn said.

He said the combination of tightening credit markets, rising domestic interest rates and the global growth slowdown could increase the force of the credit squeeze and rising defaults to a larger number of emerging markets and some developing countries.

On a positive note, Strauss-Kahn said strong growth rates would help cushion many emerging and developing countries from harder financial times.

Overall, he said emerging economies have so far escaped the declines to external financing seen in previous episodes of financial turmoil.

But that does not mean they would stay out of the direct path of the financial storm.

"Vulnerabilities are increasing and some countries with large current account deficits have had more difficulty financing them," Strauss-Kahn said.