IMF voices fears over Iraqi war

THE International Monetary Fund has issued a stark warning that fear of a war with Iraq could send oil prices spiralling upwards and strengthen the forces tending to weaken the global economic recovery.

Gerd Haeusler, director of the International Department of the IMF, was speaking in London at the launch of the IMF's latest report on global financial stability. He said that judging from the spike in oil prices before the Gulf War in 1991 'the most realistic scenario' for how war with Iraq would play out would include another 'oil price spike'. Given other uncertainties 'this might put the financial system under additional stress', he said.

The IMF makes it clear that it shares the worries of the Bank for International Settlements, the central bankers' bank in Basle, about increased risk aversion by financial institutions which has been making it difficult for weaker businesses to borrow money, something which could lead to a 'credit crunch' in financial markets.

'High-risk borrowers, already substantially weakened, are particularly vulnerable to a further retrenchment in risk-taking by investors and financial intermediaries,' said Haeusler.

Such a retrenchment could come as a result of the uncertainties and risks which lie ahead. These included 'subdued economic recovery and anaemic earnings performance pushing share prices lower. And last but not least fear of military action in Iraq'.

The European Central Bank today left its main interest rate at 3.25% as expected.