Barely two days after world’s top central bankers had asked investors to be wary of current global economic boom, the IMF chief has endorsed their views. On Friday, Rodrigo Rato – the head of the International Monetary Fund – sounded alarm bells over the recent wave of debt-based mergers. Speaking to the press before his meeting with world leaders at the G8 summit yesterday, Rato expressed fears that high inflation and a consequent rise in the interest rates could see several big corporate mergers face troubled times. He warned against the growing complacency in the financial markets. When asked about the big corporate mergers that seem to be a norm today, Rato emphasized: Some big mergers pose risks. This is not to say mergers are not good, but regulators need to be careful. I think we’re all aware that some of the (recent) costly and exuberant mergers could pose problems for the future. Referring to the collapse in the U.S. mortgage market, he highlighted that interest rates hikes are particularly unforgiving to the corporate mergers that are leveraged with high debt content. The incident in American mortgage market is a clear-cut example of what happens when cost of borrowing increases very fast than what the firms had expected initially. Commending the recent efforts, designed to counter inflation, by central banks worldwide, Rato said that the pre-emptive interest rate hikes were justified. It is believed that high-energy prices and wage pressures are exerting inflationary pressures around the world. Rato also made a reference to the contentious issue of hedge funds in his press conference. IMF welcomed the debate on the 1.4 trillion dollar industry, he said. He insisted there was no need of an extended use of protectionist measures but hedge funds must be monitored ‘through their counterparts’ closely. Amidst all the warnings, Rato still maintained an optimist outlook for the immediate future of the world economy – which he forecasted to grow at 4.9 per cent this year. This growth is slightly lower than 5.4 per cent growth achieved last year. Rodrigo Rato has only confirmed what many economists around the world have feared lately. The boom that has been witnessed around the world has increased investors’ confidence in the markets considerably. As a result, corporate takeovers and growth of hedge industry has also been extensive. This has further increased the inflationary pressures globally. Increase in the interest rates, designed to counter inflation, is a matter of concern, especially for the acquisitions that are debt-fuelled. Image Source
The International Monetary Fund has assured that Asian economies will not face any substantial financial crisis amid the heavy influx of global capital. Developing Asian economies are successfully attracting healthy foreign direct investment and IMF suggested that to keep healthy pace in the economy, each economy should introduce new measures to manage huge inflows of foreign funds and exploit them for accelerating their economic expansion. IMF Managing Director Rodrigo Rato said: Capital inflow is certainly a worldwide phenomenon. For Asian economies, that reflects a lot of things including increased liquidity and growing attractiveness of the economies. I believe that is good news A decade ago, major Asian economies were in a great crunch, BoP were not at its best, currency values were lynching down incessantly, but open market policy put economies back on the competitive international business dais. Foreign players are attracting toward the rich unexplored resources of Asian region and open market policy has opened the door for investors. With minor domestic players, foreign moneylenders are putting huge money in the market and successfully gaining strength. Service sector is the biggest gainer, but secondary sector is also accelerating from FDI. Minor economies, like Thailand, too are leaving their darker period behind and making considerable progress. China, India and Japan are leading the path, whereas South East Asian nations are backing them firmly. However, for the overall development, IMF has suggested Asian economies to become more rational for their currency policies. China impeached for unnecessary controlling its currency wherein western nations seeks more flexibility in its exchange rate. As Rato said: Greater exchange rate flexibility is not only in China’s best interest but would allow other Asian countries to appreciate with less concern about competitiveness Image Via: Reuters
Jolted by the U.S. subprime housing market, IMF’s head Rodrigo Rato has warned that global investment and growth prospects were at risk from a dramatic rise in private equity buy-outs. There are risks associated with the recent dramatic growth in large private equity buy-outs as such deals financed by huge debt could trigger risk to the market when they turn sour. Rodrigo Rato said: This in turn could adversely affect investment and growth prospects, not just in the countries where the problems occur but worldwide. I would urge regulators to remain vigilant about these deals, and pay especially close attention to deals whose failure could have systemic implications The menace of financial globalization can trigger the inflation and devalue the currency, which can be hazardous to all economies. With increasing cooperation and open market, all economies have become interdependent, and disturbance in one strong economy can easily affect others, especially developing economies, which need support from the developed economies. In the resent time, moneylenders have shown their interest to invest in developing economies, where they find huge opportunity to strengthen their base. Asian economies are biggest gainers from the strong capital inflows, but IMF warned that it could be hurt by an abrupt reversal of flows in the case of financial shocks. Asian growing economies like China and India, which are considered as the new engines of the world economic growth, will replace the United States and other developed countries in the coming time, but IMF suggested that to keep the pace of growth, policymakers should caution for financial globalization and take necessary steps in time.
For IMF head, there are two candidates to replace Mr Rodrigo Rato who has resigned for personal reasons, France’s former Economy minister Dominique Strauss-Khan and the former president of the Czech Central Bank Josef Tosovsky. Dominique Strauss-Kahn is seems a certain choice for new head of the IMF as he is backing by the EU and US. However, Russian nominee Josef Tosovsky adds some flair to the nomination. Since the inception of IMF and WB, Europe and US elect the head respectively, but for WB’s nomination, European interventions and now for IMF supremacy Russia’s intentions to ensure all members support, kindle the hope to break the preconceived biased procedure. Although, Russia is trying to break the brink, yet the Dominique Strauss- Khan’s nomination is certain. To gain the support, he recently made trip to Africa and Latin America. However G24, which represent developing nations echoed against influential nations’ supremacy over the world leading institutions. When the hunt for Mr Rato’s successor announced, the IMF cleared that the winning candidate could come from “any” of its 185 member nations. But with the time passes all announcement proved mare rubbish. The role of IMF is always challenged by the poor nation, recently African Union head Alpha Omar Konare said that he selection process was “not reflecting the balance of powers in the world today”. It’s not only developing nations’ want change, but some frontline European nations want other 185 nations’ concrete support in nomination. Russia thus has become the spokesperson for the majority of the 185 country members, particularly emerging economies that would like to see the ‘rule’ changed. Image Read