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US recession may hit emerging markets hard: Chidambaram
5/5/2006
 

          HYDERABAD , India, May 4 (AFP): A slowdown in the US may trigger a worldwide recession that if 'disorderly' will hit emerging market economies hard, India's finance minister warned Thursday.
Palaniappan Chidambaram, speaking at the 39th annual meeting of the ADB, said global economic growth continued to depend heavily on the US economy.
"A possible slowdown in the US economy may trigger a worldwide recession," Chidambaram told delegates at the seminar on global payment imbalance in the high-tech southern Indian city of Hyderabad.
"Any abrupt and disorderly adjustment in the global imbalances will result in volatility .. with direct implications for the emerging market economies," Chidambaram said.
He said global imbalances were reflected in large mismatches in the current account, or trade balance, of many countries.
The US current account deficit was a record 805 billion dollars in 2005 or 6.4 percent of its gross domestic product and is expected to grow as oil prices soar, he said.
"With rising oil prices now, oil-exporting nations have large current account surpluses and they are emerging as new players in the global field and would have to play an important role in the correction of these imbalances," Chidambaram said.
He said the impact of a US recession would be felt quickly in the currency markets, as the dollar may sharply lose value and lead the US Federal Reserve to sharply raise interest rates.
"In the asset market, these corrections will result in a sharp depreciation of the dollar and that could lead to a sharp drop in the demand for dollar assets and relocation of portfolio away from dollar assets. This could lead to a sharper rise in interest rates in the US," he said.
He said many observers were of the view that current global trade imbalances "are not sustainable for too long or it has to be resolved."
"It is generally agreed that now a disorderly adjustment cannot be ruled out a priority. That would be very costly if it occurred," Chidambaram said.

 

 
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