[Nasional-e] But a long conflict could hinder global growth, Koehler says

[Ambon]

 IMF chief sees upside of a short war in Iraq
 Alan Friedman International Herald Tribune Friday, September 20, 2002

But a long conflict could hinder global growth, Koehler says

ROME A short-term military action in Iraq would probably have only a minor
impact on the world economy, and could even produce a "positive effect" by
eliminating uncertainty over the situation, according to the head of the
International Monetary Fund.
.
But a protracted conflict with Saddam Hussein would create a "downside risk"
to the global economy at a time when prospects for recovery have weakened,
said Horst Koehler, managing director of the IMF.
.
"It depends," Koehler said in an interview. "If it is a rather short-term
action, and if it is contained to Iraq, I think the effect will be minor on
the economics, and there may even be some positive effect because it would
be a clarification of the situation."
.
"This looming threat, this unclear situation, is making investors hesitant,"
Koehler said. A protracted war in Iraq, he added, would create
"unpredictability, and that is the downside risk."
.
Later, an aide to Koehler said the IMF chief hoped for a peaceful resolution
of the conflict with Saddam Hussein so that war could be averted.
.
Koehler, speaking a week before the start of the annual meetings of the
World Bank and IMF in Washington, also cautioned that collapsing equity
prices, investor fears about corporate scandals, and volatility in world oil
prices caused by the threat of a war in Iraq could conspire to delay a
global economic recovery.
.
"Risks to the global economic outlook today are clearly tilted more to the
downside than they were a few months ago," Koehler said.
.
Among other things, the lingering impact of the WorldCom and Enron scandals
and the wealth destruction on Wall Street could have an impact - albeit
limited - on American consumers.
.
Another problem for the U.S. economy, he said, was that "continuing profit
warnings in the corporate sector could make investors hesitate more, and
that is not good for recovery."
.
Still, the IMF chief said he did not fear a new U.S. recession. He
attributed downside risks to the world economy to "further shocks during the
course of this year," including scandals in corporate governance that he
said had "worsened the situation."
.
But while policymakers were on guard against the threat of recession, he
added, "for me the bigger risk is that recovery is delayed."
.
Indeed, the most likely outcome, Koehler said, is that recovery "will
continue, slower than we had expected, and not as forcefully as we would
have wished." But this did not amount to a "doom and gloom" scenario, he
added.
.
For now, he said, the U.S. economy did not need further measures by the
Federal Reserve to stimulate activity.
.
"If things worsen, that has to be a consideration," Koehler said when asked
whether the Fed should cut interest rates.
.
"But for the time being I don't think it is necessary."
.
Koehler cautioned that, over the longer term, mounting U.S. public deficits
and excess spending would need to be curbed.
.
In a speech Thursday to the Council on Foreign Relations, he urged the
United States to "beware of falling back into chronic public-sector
deficits."
.
The message for the Bush administration, he told the International Herald
Tribune, was that "while for the short term the deficit is helpful to
counteract recessionary trends, if we fall back into deficits this would not
be good, so I think we need to contain expenditures."
.
Turning to Japan, which has pinned hopes for an economic turnaround on a
recovery in the United States, Koehler said the government should do more to
fight deflation.
.
He said Prime Minister Junichiro Koizumi had reassured him in a conversation
last week that "they would act on getting rid of nonperforming bank loans
and on corporate restructuring because these are the underlying issues for
Japan."
.
On Wednesday, under pressure from the government, the Bank of Japan made the
unprecedented announcement that it would buy shares directly from the
country's troubled banks to help them avert losses from falling stock
prices. The move was widely seen as undermining the bank's credibility.
.
Koehler said he "would be cautious about a final judgment." If the move was
part of a broader package to shore up the struggling banking sector, he
said, that would be understandable.
.
But "if it remains an isolated action to prop up stock prices then I would
have some doubts about the wisdom in that," Koehler said.
.
Commenting on the continuing financial crisis in Argentina, the IMF chief
said the country still needed to undertake a series of steps in order to
free up additional funding from the lending institution.
.
"We never ask the impossible: they need to define a monetary anchor, to
demonstrate through implementation that fiscal soundness will return and
that includes the provinces, and their Parliament needs to stop this
infighting," he said.
.
Earlier this week, the first deputy director of the IMF, Anne Krueger,
cautioned that Buenos Aires would risk a heavy penalty if it failed to make
an $800-million payment to the World Bank coming due in October.