Rato sees risk to world market from unchecked imbalances

Madrid, Mar 30 | Updated: Mar 31 2007, 05:30am hrs
Unchecked global imbalances pose a serious risk to world markets, International Monetary Fund Managing Director Rodrigo Rato said on Friday. The United States needed to boost its savings rate while China must increase domestic demand, Rato said at a financial meeting in Madrid.

There are serious risks that could affect the world economy. If economic measures are not taken to reduce imbalances between investment and savings it could be the markets that will take action on prices, he said.

Rato added his voice to a chorus of economists calling for countries to tackle widening imbalances in the world economy, skewed by deficits in the United States and large surpluses in Asia and among oil exporters. Without policy measures, there is a danger markets could force an adjustment, triggering abrupt and excessive changes in key exchange rates and asset prices, economists say. The financial markets are capable of financing external deficits in the US and in other countries, Rato said. However, the question of whether this is sustainable remains relevant.

Whereas an increase in the US savings rate is vital, a higher rate of potential growth in Japan and the European Union would help to address global imbalances, he said.

The IMF is trying to broker an agreement among five major economies - the United States, China, Japan, the euro area and Saudi Arabia - on how to reduce the imbalances. Rato also said there was a risk that rising protectionism could cut world productivity growth.

Market jitters have been heightened in recent weeks by problems in the US subprime mortgage sector, which lends to borrowers with poor credit histories at higher interest rates. Rato said excessive borrowing was a bigger risk in Europe than any repeat of the US subprime mortgage crisis.

More than thinking that (the subprime problems) could be reproduced, I believe we need to be aware that excesses in credit growth need to be watched, he said. He added that more neutral interest rates would be beneficial to Spain, the euro zones number four economy.