Latin America most vulnerable to higher U.S. rates-IMF

WASHINGTON, Sept 30 | Mon Sep 30, 2013 8:59am EDT

WASHINGTON, Sept 30 (Reuters) - Latin America is likely to suffer most if U.S. interest rates rise more quickly than economic conditions merit, the International Monetary Fund said on Monday.

But higher rates could also hit output in Europe and Asia, as any shock in the United States, the world's biggest economy and a large financial hub, usually reverberates around the world, the IMF said in a report.

The IMF said it was concerned rates may rise before the U.S. economy has fully recovered, which would most hurt countries that peg their exchange rates to the dollar.

But the global impact of a slower pace of bond-buying by the U.S. Federal Reserve is harder to gauge, the IMF said in the analytical chapters of its World Economic Outlook. The full report is due out Oct. 8.

The Fed earlier this month surprised markets when it postponed reducing its $85 billion a month worth of bond purchases, saying it needed to wait for more evidence of solid economic growth. Expectations that the U.S. central bank would start pulling back on its bond buying had prompted capital outflows from many emerging markets, as investors anticipated higher yields in advanced economies.

"A stronger-than-expected slowdown of growth in China is a major concern at present," the IMF added, though that would most likely hurt China's close trading partners in Asia and Latin America and would be less harmful to the world as a whole.

The IMF was tasked with assessing how problems in one country spread to another in the wake of the 2007-2009 global financial crisis, which showed how quickly and easily policies cascaded across borders and destabilized the global economy.

In its report, the Fund said the recent financial crisis was one of those rare periods when all the world's economies moved in lock-step, as the collapse of the U.S. investment bank Lehman Brothers spread widespread panic and uncertainty.

That period has ended but could return, as policymakers have still not finished addressing the problem of institutions that are "too big to fail," the Fund warned.

"A large financial shock could again induce the world's economies to rise and fall in tandem," the IMF said. "There are still many systemically important financial institutions whose reach spans the globe."

The IMF also said most emerging markets in Latin America and other regions were hit by volatile capital flows in the midst of the crisis, but some were better at dealing with the problem than others.

Economies like Malaysia and Mexico, with flexible exchange rates, lower inflation and better fiscal policy and economic institutions were able to counter the destabilizing flows, usually through private financial adjustment.

But less resilient countries like Indonesia, Pakistan and Turkey still suffered from the "boom and bust" cycle of sudden inflows and outflows that had bedeviled emerging markets in the past, the IMF said.

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