Low interest rates in advanced economies were prompting emerging economies to build up debt and foreign exchange exposure that could cause trouble, according to Christine Lagarde, managing director of the International Monetary Fund (IMF).
Lagarde said: “Over the past five years, foreign currency borrowing by firms in emerging markets has risen by about 50 per cent. Over the past year, bank credit has increased by 13 per cent in Latin America and 11 per cent in Asia.”
Lagarde further said that the world is dividing into three groups – doing well, on the mend, and still in trouble - and suggested developing countries to restrict credit to fast-growing areas, impose capital requirements and monitor their foreign exchange exposures.
Lagarde said: “We do not expect global growth to be much higher this year than last. We are seeing new risks as well as old risks. In far too many countries, improvements in financial markets have not translated into improvements in the real economy.”
Supporting quantitative easing by the US Federal Reserve and Bank of Japan, Lagarde said that rich economies should use fiscal policy more aggressively so there was less pressure for interest rates to stay low.
Criticising sequestration cuts, Lagarde warned that the US was cutting its deficit too fast in the short term, harming growth. “This is the major policy challenge facing the United States today and it must be met. Otherwise, the substantial gains that have been made can be too easily lost.”
Lagarde further said that the euro area and Japan still had work to improve their economies. In Japan, she warned that the public debt of 245 per cent of GDP looks increasingly unsustainable.
Commenting on restructuring of Cypriot banks, she said “the priority must be to continue to clean up the banking system by recapitalising, restructuring or – where necessary – shutting down banks.”
The IMF spring meeting will begin in Washington next week.