IMF sees risks of prolonged global crisis and unrest

MADRID (Reuters) - The global economy could fall into prolonged crisis, spreading social unrest unless governments expand and implement promised stimulus packages, the IMF Managing Director Dominique Strauss-Kahn said on Monday.

Growth is plummeting in China as the global economy suffers an unprecedented fall in output and veers towards recession, raising risks of more civil unrest like that seen in Greece, Strauss Kahn said.

Without greater urgency on the part of governments, the beginning of a global recovery in late 2009 or early 2010 could be delayed, he said.

“A lot remains to be done and if this work is not done it will be difficult to avoid a long lasting crisis that everyone wants to avoid,” he said during a conference on IMF-Spanish relations.

He saw violent protests spreading unless the financial system was reorganized to benefit everyone, and not just a small elite.

“If we are not able to do that, then social unrest may happen in many places, including advanced economies,” he added.

The IMF will probably cut its current 2.2 percent forecast for global growth next month as governments prove unwilling or unable to budget sufficient public funds to restore economic confidence, Strauss Kahn said.

He singled out the European Union’s stimulus package, worth 1.5 percent of gross domestic product, as insufficient.

Strauss-Kahn said European leaders were using pre-crisis budget deficit limits to design the package instead of adopting new rules to fit the size of economic problems.

“We are facing an unprecedented decline in output and we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures, he said.

The IMF recommends global governments spend a combined 2 percent of global gross domestic product or $1.2 trillion to reduce the risk of a damaging global recession.

It backs hefty government recapitalisation of banks to restore financial system confidence.

“A lot has been announced but I believe the follow up isn’t going fast enough, and that is one of the components of the lack of confidence,” Strauss-Kahn said.

A symptom of that is sagging growth in China, he said.

“We started with China at 11 pct growth then 8 then 7 then China will probably grow at 5 or 6 percent. The possibility of a global recession is real, we realise something must be done,” said Strauss-Kahn.