IMF managing director Christine Lagarde has warned that the worldwide financial crisis is deepening and more threatening than ever.
In a speech at the Economic Club of New York on Wednesday she advocated the closing down of failing banks.
She said: ‘We simply cannot have pre-crisis banking in a post-crisis world. We need reform, even in the face of intense pushback from an industry sometimes reluctant to abandon lucrative lines of business…
‘To stay ahead of the crisis, we need to see more progress in other important dimensions. What do I mean? For a start, the “oversize banking” model of too-big-to-fail is more dangerous than ever.’
She continued that the crisis had created a ‘three-speed economy’ with the eurozone at the bottom of the list.
Lagarde described the differences between the world’s regions as ‘starker than ever’.
She said: ‘We are now seeing the emergence of a “three-speed” global economy — those countries that are doing well, those that are on the mend, and those that still have some distance to travel.’
Lagarde said that the eurozone and Japan belonged to the ‘third speed’, where countries still have ‘some distance to travel’ to recover.
She said that many banks in the eurozone do not have ‘enough capital and had too many bad loans on their books’.
Lagarde warned: ‘Monetary policy is “spinning its wheels” – meaning that low interest rates are not translating into affordable credit for people who need it.
‘The plumbing is clogged up, and we are seeing more financial fragmentation. …So the priority must be to continue to clean up the banking system by recapitalising, restructuring, or — where necessary — shutting down banks.’
She stressed: ‘The bottom line is that we need a global financial system that supports stability and growth.
‘Until now, this has been lacking. In too many cases, from the United States in 2008 to Cyprus today, we have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a business model that ultimately destabilises the economy.’
Lagarde added: ‘In terms of other issues: derivatives are still the dark matter of the financial system – as of last September, only one in ten credit default swaps were cleared through central counter-parties. Shadow banking is still a shady corner toward which risk appears to be gravitating. This is true in advanced as well as in emerging economies.’
The IMF chief also said that America’s problems were ‘far from’ solved. She said its $85bn (£55.5bn) sequestration cuts, which would cut US output by 0.5 per cent, risked ‘throwing away needed growth, especially at a time when too many people are still out of work.
‘Adjustment is too aggressive in the short term, and too timid in the medium term. This adds to uncertainty and casts a shadow on the recovery.’
• Cyprus is to sell its gold reserves to help fund the Troika-imposed bailout.
The European Commission told Cyprus it must sell 400m euros (£341m) worth of gold, or there will be no bailout.
Even with it, the Cypriot economy will shrink by 8.7% this year.
Cyprus’ total bullion reserves stood at 13.9 tonnes at the end of February. At current prices, 400m euros’ worth of gold amounts to about 10.36 tonnes of metal.
The sale will be the biggest bullion sale by a eurozone central bank since France sold 17.4 tonnes in the first half of 2009.
European finance ministers meet in Dublin today to discuss the Cyprus bailout.
Portugal holds 382.5 tonnes of gold in its reserves, worth some 14.76bn euros at current prices, while Spain’s holdings stand at 281.6 tonnes, worth 10.8bn euros. Italy is the world’s fourth-largest gold holder, with 2,451.8 tonnes, worth 94.6bn euros.
More gold sales are likely as the EU continues to collapse.