IMF's Koehler sees risk in financial world

WASHINGTON, Sept. 29 (UPI) -- Horst Koehler, managing director of the International Monetary Fund, said Sunday he saw "widespread signs of risk aversion" in world financial markets but he expressed confidence that investors will not panic.

In a speech to finance ministers and central bank governors from the IMF's 184 member countries, Koehler urged investors and policy makers to take a sober view of the "risks and uncertainties" facing the global economy.

"We should be aware of undue pessimism," Koehler said. "There are good reasons to expect the recovery will continue." The IMF predicts the global economy will grow 2.8 percent this year, up from 2.2 percent in 2001.

Koehler said financial markets are likely to recover from their recent bout of jitters.

"While there are widespread signs of aversion, I trust that there are entrepreneurs who look for new opportunities and are not content to follow the herd," Koehler said at the annual meeting of the IMF and World Bank.

Investor concerns about corporate earnings, sluggish economic growth and the prospect of war with Iraq have caused weakness in U.S. stock prices. On Friday, the Dow Jones industrial average dropped 295.67 to close at 7,701.45, which for the week was down 3.6 percent. European and Japanese stock prices have also been hurt.

Koehler said he was encouraged that the organization's members know what to do in case of further signs of weakness in economic activity.

"Monetary policy should be the first line of defense, as long as inflation prospects remain subdued," he said. "I also expect a boost to confidence as the advanced countries take energetic action to tackle underlying impediments to stronger growth."

Koehler also said the world's advanced countries have a particular responsibility and must show leadership in making the global economy stronger.

"We look to the United States to set a continued example, and to guard against the reemergence of sustained fiscal deficits," the IMF's managing director said. "We look to Europe to stick to the Stability and Growth Pact and accelerate structural reforms in labor markets and pensions systems."

He also called on Japan to move forward with reforms of its banking and corporate sectors, and to act decisively to end deflation.