Dominique Strauss-Kahn, managing director of the IMF, said the unprecedented measures taken by the U.S. and Europe have so far failed to restore confidence.

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown," Strauss-Kahn told the International Monetary and Financial Committee.

He said additional steps will be needed to stabilize the financial system in the coming months because "the measures have not yet achieved the goal of stabilizing markets and bolstering confidence."

Strauss-Kahn said credit conditions are continuing to tighten and constrain the ability of banks and companies to access funding.

"Looking ahead, financial conditions are expected to remain very difficult, restraining global growth prospects," Strauss-Kahn said.

The IMF has warned of a sharp slowdown in the world economy next year and said financial sector losses could total US$1.4 billion. Strauss-Kahn said inordinate amounts of leverage created the crises and that unwind will likely be long and arduous.

Strauss-Kahn proposed a four-point action plan to stem the downward spiral in world markets and begin to rebuild confidence.

He called for a public capital, temporary government guarantee of liabilities, forced recognition of losses, and co-operation.

He said the public sector will need to get involved because raising private capital will grow difficult as losses mount and the world economy slows.

"Because private money is scarce in today's environment, support from the government is needed," Strauss-Kahn said.

Due to the "fragility of public confidence" governments must explicitly guarantee deposits in the short-term funding system.

"This means guaranteeing not only retail bank deposits but probably also interbank and money market deposits as a means to restart activity in these key markets. Such a step should be temporary," Strauss-Kahn said.

Governments need to force the recognition of losses and remove troubled assets from the financial system, Strauss-Kahn added. He said it should be done at fair value and should allow taxpayers to be able to share upside gains once the crisis passes.

He also promoted a co-operative approach.

"A high degree of international co-operation has become urgent.," he said. "During the past week the collapse in confidence in the markets has been almost matched by a collapse in confidence between countries ¥ We saw a very bad trend toward unilateral measures taken with national interests in mind."

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca

The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.