An economic timebomb?

Press, 7 October 1987, Page 40

An economic timebomb?

PA Wellington Stability in the world’s finances will not be achieved till the late 1990 s in view of the present huge trade account imbalances of developed countries and mounting indebtedness, according to the chairman of Lloyds Bank pic, Sir Jeremy Morse.

Speaking to reporters on Monday, Sir Jeremy said the imbalances were a “timebomb” largely ignored by countries at the recent International Monetary Fund (IMF) meeting in Washington, which he attended.

Those imbalances, largely in the United States, Europe and Japan, resulted from growth in

the U.S. economy between 1983 and 1985, stimulated by the country’s high fiscal deficits. While that growth had staved off recession in the major countries as they pursued policies to squeeze inflation down to single figures, it should have been followed by a concerted effort to cut the U.S. deficits, Sir Jeremy said.

"The U.S. would have cut back particularly on its fiscal deficit and on its growth, and Japan and Europe would have been more willing than they were to pick up the growth challenge. But that opportunity was fluffed last year, so it is being done now rather slowly

and painfully.” Efforts were, nevertheless, now being made to address the deficit and growth problems. Sir Jeremy, the IMF had also failed to face the build-up in the U.S.*s net indebtedness, likely to reach SUSI trillion by the early 19905.

“That will mean we will be running the world on a reserve currency with a heavy indebted position and will mean periodic instability through the 905.”

Debt problems involving Latin American countries persisted, he said. But Brazil’s indebtedness, as the worse case, was “moving towards coming under control” after a

recent setback with the failure of a plan to curb soaring domestic inflation. Sir Jeremy predicted also the world’s largest sharemarkets, in a period of unprecedented rises, may be headed for a crash. “I don't think it is a certainty but I think a reversal is an absolute certainty.” The booming markets were fuelled by high liquidity, much of it stemming from the U.S. trade deficit “If and when that is curbed then, in the drying up of liquidity, there must be some kind of reversal.”