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IMF Exec: More Bad Financial News

October 28, 1998

SINGAPORE (AP) _ More bad financial news and foreign exchange volatility will occur before the Asian economic crisis bottoms out next year, a senior International Monetary Fund executive said Wednesday.

Because of severe risk aversion among institutional investors, a credit crunch in major markets, as well as emerging ones, ``may last some time,″ said Flemming Larsen, the IMF’s deputy director of research. Further interest rate reduction may be needed, especially from Europe, he said.

``We’re likely to get more bad news on the real side, which will give rise to further volatility on the financial markets before the crisis is over,″ he said at a news conference.

``There is going to be very little financing available for many emerging market countries in the period ahead,″ Larsen said.

Financing is just what is needed to help the restructuring Asian economies recover. But investors were spooked by the Russian devaluation and are now fleeing to quality investments and looking to reduce debt and exposure, he said.

``I don’t know how long this (credit crunch) is going to last,″ he said. ``My suspicion is we have not quite seen the end of it.″

But he predicted, as other IMF officials have done, that some of the Asian economies will start to turn up during the course of next year, particularly Thailand and South Korea.

Larsen was hopeful that European central bankers would follow the Federal Reserve in lowering interest rates to ease money supply.

``It is reasonable to interpret (European) central bank statements as implying a certain awareness of the dangers that lie ahead and readiness to ease funds,″ Larsen said. They may be willing to do so, ``to the extent it would not compromise price stability.″

In the area of the soon-to-be-introduced European currency, price stability is in good shape, he added.

Larsen did note some positive signs that may construct a framework for economic recovery. These include the recent stabilization of foreign exchange rates; dramatic turnarounds in trade balances of the crisis-hit countries, mostly because of sharp reductions in imports; and signals that Japan will soon move to increase demand and spending.

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