Faster banking sector 'cleansing' needed: IMF head


July 15, 2010 Updated Jun 8, 2009 at 3:01 PM CDT

Nations must speed up their "cleansing" of banks' toxic assets in order to get credit flowing, or risk scuttling a global economic recovery in 2010, IMF director Dominique Strauss-Kahn said Monday.

"The most credible scenario is that recovery will take place in the first half of 2010, with a turning point in September or October," Strauss-Kahn said in a speech at the International Economic Forum of the Americas in Montreal.

But countries must speed up efforts to decontaminate their banking sectors of bad investments that triggered a global credit crunch and fanned a recession, he said. "The process is much too slow."

"That's probably the biggest downside risk for a 2010 recovery," said Strauss-Kahn.

"You'll never recover until the cleansing has been completed," he said.

Also worrying, according to Strauss-Kahn, is that foreign capital required by emerging countries such as Mexico, Colombia or Poland has dried up, which could lead to "consequences for the rest of the world."

And developing countries reliant on trade, though mostly unscathed by last year's credit crunch, are now reeling from an ensuing slowdown of the global economy, stoking fears of civil unrest and war, he said.

"It's a global concern for the recovery itself because in those countries democracy is in most cases rather new and unstable," Strauss-Kahn explained.

"Economic problems create social unrest and social unrest creates threats to democracy and in turn those problems may turn to civil war, or foreign wars," he said, pointing to "a lot of examples in the past" of this cascading of economic woes into armed conflict.

Other concerns include how to live with the huge increases in fiscal deficits and public debt accumulated over the past year to pay for massive stimuli to try to soften the recession.

"This probably avoided a deeper crisis," Strauss-Kahn said. "However, there's a cost."

"After the crisis the world will not look like it was before," he said. In addition to the curbed fiscal situation, "a new balance of power among nations will take place."

"The next world will not the same."

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