Currency Watch: IMF convenes as world markets stumble

It is fair to say that the IMF had an underpinning influence this week as they pulled the strings on the world markets.

The IMF spring talks commenced this week on the back of what was one of the worst performing weeks for US and European equities so far this year.

Not wasting any time, its Global Economic Outlook Report was quick to forecast Eurozone shrinkage and indicated contraction of Spanish and Italian economies by 1.9% and 1.8% respectively for this fiscal year.

With soaring short term borrowing costs being experienced by the Eurozone peripherals, the long term economic outlook for the Euro is looking bleak.

Spain announced a huge exposure of its banking systems to bad loans as a result of its current housing crisis. Italy revised its deficit targets downwards and the Portuguese Prime Minister didn’t rule out the possibility of a second bailout.

Some degree of rectitude was seen in the shape of the Global Financial Stability Report. Clear instruction and strict adherence was doled out by the IMF.

The terms of the de-leveraging programme were quantified and deadline targets were set. The key with any kind of restructuring is co-ordination and volume.

In order for the Euro to survive, the banking system must maintain a credit supply to businesses and individuals while at the same time bolstering their capital requirements by namely selling non–core assets and by lending less.

The UK enjoyed mixed emotions this week. After maintaining its AAA rating over the weekend, Moody’s rating agency confirmed the stability of UK debt.

Lower than expected unemployment figures and the timely denouncing of further quantitative easing by the Bank of England, sent GBP/EUR and GBP/USD through the roof reaching, a 22 month high of 1.2250.

However, any joy was short lived as focus quickly shifted to next week’s Q1 GDP figures. Analysts haven’t ruled out the possibility of a negative figure for another successive quarter, which will technically push the UK back into recession.

Looking forward, the next step is to address the Spanish banking crisis being caused by the housing crisis.

The IMF needs to bolster the kitty during the week to ensure a pit-fall should further bail-outs be required and finally, positive GDP figures next week for the UK are a must.

Jeremy Cook is chief economist at World First foreign exchange