IMF Intensifies Work on Subprime Fallout

• Pages: 17-21

Page 17

Following the recent subprime mortgage crisis in the United States and the resulting global market turmoil, the IMF has recalibrated its work program and launched a number of initiatives with the aim of developing policy proposals both to deal with the present crisis and to improve the Fund's capacity to identify potential trouble spots.

The crisis, which erupted in mid-2007, has had far-reaching and still-evolving consequences. The shock has forced significant writedowns at some of the world's largest financial institutions and required, in some cases, significant capital injections from existing and new shareholders, including sovereign wealth funds.

Some central banks have responded by lowering policy interest rates and by amending the terms of their usual lending facilities to provide much-needed liquidity to interbank markets. Financial regulators too are reexamining the extent to which existing prudential norms and regulations may need to be amended.

Notwithstanding these responses, the impact of the crisis is likely to be pro-Page 20tracted, and most forecasters-including the IMF-have scaled back their estimates of growth for this year. (See pages 18-19 for the IMF's latest estimates for global growth and an update of its views on financial markets.)

The IMF will provide an updated and in-depth look into the state of financial markets worldwide in its next Global Financial Stability Report (GFSR) in early April, building on the Fund's policy prescriptions contained in its October GFSR.

Focusing on member countries

To better understand the complex interactions between financial markets, the IMF has ramped up its work-both in-house and with its member countries and other international institutions-to analyze the causes of the crisis, its spillovers to the world economy, and the possible policy responses.

The IMF's first priority is to help its member countries address their economic and financial vulnerabilities in this new, volatile environment, even if these vulnerabilities are not directly related to the subprime crisis.

At the bilateral level, the preparation and delivery of country assessments and updates under the joint IMF-World Bank Financial Sector Assessment Program (FSAP) to member countries, which was already on the rise, was stepped up further following the crisis, as national authorities are...