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November 24, 2009

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IMF chief warns that the worst may not be over

The global economy is in a holding pattern and vulnerable to more upheaval, the head of the International Monetary Fund said yesterday, adding that a lasting recovery will depend on policy makers taking the proper steps in the coming months.

Dominique Strauss-Kahn, the IMF's managing director, said the top priority in rich countries should be making plans to clean up the fiscal mess left by more than a year of crisis-fighting efforts, although he thought it was still too early to remove such emergency supports.

"We recommend erring on the side of caution, as exiting too early is costlier than exiting too late," Strauss-Kahn said in remarks prepared for delivery to the Confederation of British Industry's annual conference in London.

Since the financial crisis intensified following the messy collapse of Lehman Brothers in September 2008, governments and central banks have committed trillions of dollars in stimulus money and financial sector guarantees as well as cut interest rates to record lows in most advanced economies. Those efforts helped to stem the crisis, he said.

"So, we stand at a critical juncture," Strauss-Kahn said. "The sustainability of this recovery will depend on the decisions taken by policy makers in the months to come." He cautioned that the sense of global policy unity forged during the darkest days of the financial crisis might dissolve and urged close cooperation even though exit strategies differ from country to country.

For advanced economies, where debt burdens have grown sharply over the past year, the IMF wants governments to design and communicate plans to get their respective finances back in order.

That means ensuring stimulus measures are temporary and putting entitlement programs on a sustainable path. Eventually, more drastic measures will be necessary, Strauss-Kahn said, including spending cuts and in some cases tax hikes.

"I see fewer problems with monetary policy," he said, adding that central banks had the proper tools to unwind the emergency lending programs they cobbled together in the midst of the financial panic.


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