Global economy faces 'chaos' - Report From Singapore in The Brunei Times [View All]

Have you heard this one on our so called National media? Bet not! Another one of Bush's legacies!

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http://www.bruneitimes.com.bn/details.php?shape_ID=34567

Global economy faces 'chaos'

Bernice Han

SINGAPORE

25-Jun-07

Imbalances in financial system are real threat, can undermine financial stability

THE international community faces a real risk of "economic chaos" arising from major imbalances in the global financial system, the World Economic Forum on East Asia was told yesterday.

Complacency has set in after years of uninterrupted global growth and there was no evidence to suggest a self-correcting mechanism was in place to avert a major shock to the global financial system, delegates to the two-day forum were told.

Tharman Shanmugaratnam, Singapore's Second Minister for Finance, warned the financial contagion would hit when it was least expected and bring about a "vicious" aftermath.....

The global imbalances traditionally refer to the twin US budget and current account deficits, the accumulation of huge foreign currency reserves by Asian central banks and divergent growth rates in the world's major economies.

Leading financial institutions including the International Monetary Fund have warned the imbalances have the potential to undermine global economic growth and financial stability.

Part of the problem stems from Asia, which holds the vast majority of the world's foreign reserves at about US$2.7 trillion and the region has to do something about it, the Thai finance minister said. "It seems like East Asia is simply accumulating these deficits from the United States and the more they accumulate, the more they want to protect, to make sure the value of the US dollar does not decline because otherwise all the central banks will have a problem," Chalongphob said.

"So I think this is where East Asia does have a major role to play in shaping the direction of the global financial system, as the region which holds most of the world's official reserves," he said.

Shanmugaratnam said the global community must brace for "the unknown unknowns that come along every few years, and it could be a pretty vicious unknown unknown with an unwinding that's unpredictable in global financial markets".

Bubbles in the property and equity markets are evidence suggesting that a financial shock could come, said Shanmugaratnam.

"There's a high degree of complacency coming out of a very long period of a low interest rate environment and a low volatility environment, but seasoned observers, those who have been around long enough, know that a shock is very likely to come at some point. You really can't tell how this unwinding is going to play out, but it could be substantial and I think emerging markets have to brace themselves, have to put in place the shock absorbers to deal with this sort of event."