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September 5, 2009

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Recovery to be sluggish, warns IMF

THE global economy is emerging from a deep downturn but the recovery will be sluggish and unwinding stimulus measures too soon could derail an upswing, IMF Managing Director Dominique Strauss-Kahn said yesterday.

Strauss-Kahn told a Bundesbank conference in Berlin that there were risks of a rise in unemployment, which he said could lead to a decline in potential growth and social consequences he said were "even more worrisome."

"Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment," the International Monetary Fund chief said. "Therefore, exit policies should only be launched once there are clear indications that the recovery has taken hold and that unemployment is set to decline."

Caution on inflation

Strauss-Kahn said while he believed the time was right for policy makers to develop exit strategies, he urged them to "err on the side of caution" when deciding when to begin implementing them.

The French IMF chief said central banks could face challenges to their independence as the global economy emerges from the crisis, including political pressures to "inflate the debt away," adding that these must be resisted.

He also expressed concern that an improvement in financial markets was leading to complacency in dealing with problems in the banking system, including reform of compensation practices.

"We must also act decisively to promote the reform of compensation policies in the financial industry," he said.

"And I worry that as the financial sector emerges from crisis, a business as usual mentality may prevent serious progress from being made," he added, saying progress on the issue could come from a weekend meeting of G20 finance ministers.

Strauss-Kahn also touched on the dollar's role as a reserve currency. An increase in its value during the crisis had shown its status as an unrivalled safe haven asset, and predicting the search for alternatives would be decided over the coming decade, rather than the coming months.

"As the global economy evolves, we are likely to see new currencies rise in stature and international usage, leading perhaps to a system with several co-equal anchor currencies," he said.

"The international community may even decide that the creation and promotion of a new reserve currency is what would be best," he said.


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