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IMF: US-caused global credit squeeze may threaten world economy    
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Source: thestar.com.my

WASHINGTON (AP) - The recent global credit squeeze caused by the meltdown of risky U.S. mortgage loans may test the ability of the world's economy to keep expanding, the International Monetary Fund said Wednesday.

The IMF also said government policymakers would be confronted with new problems from the continuing process of globalization and warned against overconfidence that economic stability would continue indefinitely. In the analytical chapters of its World Economic Outlook released in advance of the Oct. 17 publication of the forecast, the IMF said the durability of the global economic expansion is likely to persist.

"Nevertheless, with financial markets around the world now being affected by the fallout from the U.S. subprime mortgage difficulties, a broader economic slowdown cannot be ruled out,'' the IMF said. Rodrigo de Rato, outgoing head of the IMF, said Monday in an interview with the London newspaper Financial Times that the credit crisis was "not a storm in a teacup.''

While the crisis may not continue to rage with the same intensity as before, de Rato said, it will take "a few months, probably into next year,'' before liquidity, availability of credit and risk spreads would return to more normal levels. The IMF report is issued in advance of meetings of the Group of Seven major industrialized nations and the annual meetings of the IMF and its sister organization, the World Bank, on Oct. 20-22. The IMF warned against overstating prospects for future stability.

"The process of globalization continues to present policymakers with new challenges as reflected in the difficulties in managing volatile capital flows, increasing exposure of investors to developments in overseas financial markets and the uncertainties associated with large current account imbalances.'' The IMF said interest rates had returned to more neutral levels in most major advanced economies.

But the 185-nation lending organization said, "The correction of asset prices in some countries and the current rise in risk premiums and tightening credit market conditions may also test the strength of the current expansion.'' In a chapter titled "Globalization and Inequality,'' the IMF said the debate on the effects of globalization is polarized between two points of view. One school argues that globalization leads to a rising tide that lifts all boats.

The opposing school argues that although globalization may improve overall incomes, the benefits are not shared equally among the citizens of a country. The IMF said available evidence "does suggest that income inequality has risen across most countries and regions over the past two decades, although the data are subject to substantial limitations.

"Nevertheless, at the same time, average real incomes of the poorest segments have increased across all regions and groups,'' the fund said. Among the largest advanced economies, the IMF said, inequality appears to have declined only in France. Among major emerging market countries, trends are more diverse, with sharply rising inequality in China, little change in India and falling inequality in Brazil, Mexico and Russia.

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