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Former IMF chief warns financial crisis to get worse
by Kay Murchie

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.

http://www.financemarkets.co.uk/2008...-to-get-worse/






Worst of financial crisis is still to come, ex-IMF chief Ken Rogoff warns
By Malcolm Moore in Shanghai

The worst of the global credit crunch is yet to come, a former IMF chief economist has warned.

Kenneth Rogoff said that the world’s economy faces further problems in the months ahead, and predicted that at least one major U.S bank will go under.

His comments come as a new report claimed that some areas of the country will take eight years to recover from the current housing market downturn.

Estate agent Savills said that a full recovery in house prices is not expected in the North East and Northern Ireland until 2016.

Rogoff's stark warning had a direct impact on shares in British banks today with Barclays shares down 4 per cent in early afternoon trading.


Speaking at a financial conference he said: ‘ I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'.’

'We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks.'

Rogoff was the International Monetary Fund's chief economist from 2001 to 2004 and is now an economics professor at Harvard University.

'We have to see more consolidation in the financial sector before this is over,' he said, when asked for early signs of an end to the crisis.

'Probably Fannie Mae and Freddie Mac. These giant mortgage guarantee agencies are not going to exist in their present form in a few years.

In a warning sure to be heeded by the Bank of England, Rogoff said that the U.S Federal reserve had been wrong to cut its interest rates so dramatically.

He said: 'Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States.'

Savills said that house prices in London, the South East and Scotland are likely to have returned to their 2007 levels by 2012.

The group said property transactions were currently running at half of last year's level, while the number of new homes being built is expected to
continue to fall.

As a result, it said, supply was likely to become constrained in many markets over the coming months, leading to sharp price increases in certain areas of the country once demand began to increase again.

Yolande Barnes, head of Savills residential research, said: 'This property market downturn has affected virtually all property sectors and UK regions simultaneously but regions will vary far more when the upturn comes.

'The lack of turnover and new supply which is such a feature of the this downturn will be likely to lead to sharp increases in value in high demand, low supply areas.

'Competition amongst homeowners will once again lead to rising prices, particularly in those areas with higher levels of housing market equity and stronger household purchasing power such as London, the South East and Scotland.'

The group said the current downturn was severe and was likely to last for at least
another year, with homes losing 25% of their value between 2008 and 2010.

Worst of financial crisis is still to come, ex-IMF chief Ken Rogoff warns - Telegraph