[PEN-L:30387] war is the health of the imf........

["Ian Murray" <seamus2001@xxxxxxxxx>]

The International Herald Tribune | www.iht.com

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.