Asian economies are expected to be slightly affected by heightening economic risks in the euro zone and the US, say the heads of multinational agencies.
Ms Lagarde exchanges views with Dr Prasarn yesterday. CHANAT KATANYU
Christine Lagarde, managing director of the International Monetary Fund (IMF), has expressed concern about the euro-zone leaders' fragmented approach to tackling fundamental problems.
Ms Lagarde said the euro zone has become the world economy's major risk. Development of the sovereign debt crisis has expanded to questions into the future of the euro zone and the viability of the monetary union.
However, she is "desperately optimistic" in the future collaboration of euro-zone leaders in preventing the euro crisis from escalating.
"This is a tough call that political leaders need to address. But they address the situation often on a fragmented basis and very often it is regarded by investors as too little, too late," she said in Bangkok yesterday.
Ms Lagarde said the euro-zone leaders are resolving the crisis against two adverse factors _ the members' fiscal health and the fundamental problem of competitiveness disparity among members of the euro area.
"The unit labour cost of countries like Germany, Finland and the Netherlands on the one hand and Greece, Ireland and Portugal on the other ... they are on the opposite ends of the spectrum, which means their economic fundamentals are not in sync," she said.
The leaders, however, have come up with an encouraging commitment to creating an ample financial aid fund of US$1 trillion. But the IMF proposed that the euro-zone leaders agree on creating banking and fiscal unions as part of the crisis resolution.
Ms Lagarde addressed an economic forum co-hosted by the Asian Development Bank (ADB) and the Thai government as part of her 10-day tour in Asia, which also includes Japan and Indonesia.
Ms Lagarde noted that Asian economies are "vibrant and buoyant" in light of sound corporate and fiscal stability, a contrast to western countries.
The euro-zone uncertainty and the US economic policy before the presidential election this year are two key downside risks for the IMF's world economic growth revision due next Monday.
Ms Lagarde said the US economic recovery after the sub-prime crisis in 2007 and 2008 was "tepid" and contradictory to its prediction in 2010 of stronger US growth resulting from financial-sector restructuring.
The failure of US lawmakers to push for extension of tax cuts and delay the cuts in fiscal spending could weaken the US economy significantly in 2013, she said.
"The combination of debt ceiling disruption followed by the fiscal cliff of the US could equate to the deficit shrinking by 4% of GDP," she said.
US lawmakers, however, are expected to agree on the matter following the presidential election, she added.
ADB president Haruhiko Kuroda said the strong growth of China and India will help bolster the economic growth in most developing economies. The ADB has revised down its Asia growth forecast to 6.6% from 6.9% this year and to 7.1% from 7.3% in 2013.
Mr Kuroda said China had ample fiscal room to bolster consumption after robust growth in investment. India, meanwhile, was relatively less dependent on export demand for economic growth.
But European's reduction of lending in the region could affect financing of investment, said Mr Kuroda.
He added a long-term challenge for Thailand is to improve income equality.
Prasarn Trairatvorakul, the Bank of Thailand's governor, said financial volatility exacerbated by the euro-zone crisis had posted challenges in how to find a balance between risk and return of central bank assets. This is due in part to Western central banks' use of non-traditional measures.
"We have to hold a certain amount of currency reserve in euros, US dollars, yen and pounds. All of them carry negative returns. If we deposit our assets in euros at the Bank for the International Settlements, we will get a tiny interest rate and they charge us fees. We get negative yields to get into certain credit level of the euro," Dr Prasarn said in the same panel.
The Bank of Thailand yesterday signed an agreement with the IMF to establish Thailand's technical assistance office for Laos and Myanmar. The technical assistance is in such areas as monetary policy and the financial institutions supervisory policy for the subregion.
