Former IMF chief warns financial crisis to get worse

| August 19, 2008 | 0 Comments

A respected former chief economist of the International Monetary Fund (IMF) has warned that the global financial crisis is set to get worse and could result in the collapse of a large US bank within months.

Professor Kenneth Rogoff, who held the IMF role between 2001 and 2004, claims that the worst is to come from the global credit crunch, particularly in the US. He believes the financial crisis is midway through and that the US is ‘not out of the woods‘.

Speaking at a conference in Singapore, Professor Rogoff also said that one of the big investment banks or big banks in the US will go under in the next few months.

He forecast that Fannie Mae and Freddie Mac would probably not exist in their present form in a few years and said more consolidation in the financial sector is yet to come.

Fannie Mae, which is America’s largest mortgage finance company, and its sister company, Freddie Mac, have both suffered as a result of the problems in the US housing market and the sub-prime crisis, as borrowers defaulted on home loans.

Both companies, who are government sponsored, guarantee almost 50% of the country’s mortgage debt.

As mortgage guarantors, they must pay out when homeowners default on their loans. As the US housing market continues to suffer, finances at the company have suffered as a result.

The US Federal Reserve left interest rates unchanged at 2% last week after dramatic cuts in late 2007 and early 2008.

However, Mr Rogoff said the Federal Reserve was wrong to cut interest rates as aggressively as it did. He went on to say that slashing interest rates will lead to a lot of inflation in the next few years in the US.

Following his announcement, shares plummeted in Europe and Asia. In London, banking shares took a battering and the FTSE 100 index was down 74.8 points in early trading.

Financial sector shares were particularly badly hit in Tokyo, where they led the Nikkei 225 Index into a 300-point decline.

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