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Top Bis Banker Sees No End To Credit Crunch Fallout

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DAVOS, Switzerland (Reuters)

There is no end in sight to fallout from the credit squeeze that may trigger a big slowdown in U.S. growth and chill other economies too, a top central banker said on Friday.

This week, stocks suffered their biggest one-day fall since the 9/11 attacks on the United States as investors feared the credit squeeze triggered last August by defaults in the U.S. mortgage market would tip the United States into recession.

The severity of the credit crisis has cost banks over $100 billion (50.5 billion pound) in writedowns as buyers shun complex financial products linked to unpaid home loans.

"We don't know how far this deleveraging and weakness in the pricing of risky assets will go," Malcolm Knight, general manager and CEO of the Bank of International Settlements told Reuters.

"If it begins to significantly affect the real economy, in the U.S. in particular, then it creates the risk that there will be a significant period of weak global economic performance," the head of the central bankers' bank said.

"The idea that the rest of the world will be immune to that development is a bit eccentric," Knight added.

Top EU policymakers insisted this week the 27-nation bloc was in a better situation to weather any downturn than the United States, which is saddled with weak consumer savings and high public deficits.

And Australia's Trade Minister Simon Crean told Reuters on Friday Australia's export markets to Asia would shield it from credit crunch fallout.


The length of time it was taking to identify and quantify remaining writedowns has prompted regulators and central bankers to review whether market rules need changing.

Knight said the crisis has shown that the world's financial regulatory system was "Balkanised" or segmented and in need of better coordination among watchdogs.

"It leads you to a very clear conclusion, which is that unless there is a way to get valuations of financial firms in a more timely manner and more consistently across institutions -- until that uncertainty can be eliminated -- this deleveraging dynamic is going to continue," Knight said.

It was not possible to predict which market will suffer next, Knight said but he stopped short of calling for radical remedies.

"A lot of these things should be fixable by the private sector with light touch regulatory involvement. But where there are market failures the regulatory authorities are going to have to step in," Knight said.

A global financial system needed a global approach.

"There needs to be much more cooperation among financial regulators and supervisors across market segments and jurisdictions," he added.

"The objectives of regulation have to be made more clear and exacting, the regulation has to be principles-based, and the process of strengthening financial regulation should involve more dialogue with the private sector on what things should be fixed," Knight said.

Slower U.S. growth would see the rest of the world becoming less willing to fund American's big current account deficit, thus putting downward pressure on domestic demand, a core driver of the economy.

"An element of that external adjustment process could be increased volatility of exchange rates, which could create a lot of tensions. That's a very important element that central banks and finance ministries need to take into account," Knight said.
Edited by the_austrian
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Top EU policymakers insisted this week the 27-nation bloc was in a better situation to weather any downturn than the United States, which is saddled with weak consumer savings and high public deficits.

Yep, UK Finances are just fine, there's no way the UK could be saddled with weak consumer savings and high public deficits, so we are in a great situation to weather any financial storm.

Move along sheeple, nothing to see here, it's only a US problem, the economy is just fine, Gordon and Darling have it under control......

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