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August 20, 2008

US economy:
Economist sees large US bank going under
Recession likely in the next few months

The worst of the global financial crisis is yet to come and a large US bank will fail in the next few months as the world's biggest economy hits further troubles, Reuters quoted former IMF chief economist Kenneth Rogoff as saying Tuesday.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest US home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalise the US housing finance titans.

A government move to recapitalise the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

In response to the sharp US housing retrenchment and turmoil in credit markets, the US Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.

Rogoff said the US Federal Reserve was wrong to cut interest rates as "dramatically" as it did, adding, "Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."

Meanwhile AFP reported, quoting UBS bank economists in Zurich, that the United States is likely to slip into recession in the coming months as the cushioning impact of sharp interest rate cuts and tax rebates wears out.

“Sharp cuts in interest rates and tax rebates have prevented the US economy from sliding into recession until now,” said UBS in a statement.

“But the economists of UBS Wealth Management now expect the effects of fiscal concessions to peter out in the second half of the year, leaving the US economy facing the inevitable prospect of recession.”

Real economic growth in the United States is expected to reach 1.3 percent this year, but just 1.0 percent next year.

In the Eurozone, a sustained period of weakness is forecast, but the region is unlikely to sink into a severe recession, the bankers said.

The outlook for Asia’s fast-growing economies is also uncertain, added the economists, noting that a “steady deceleration in growth” is seen for the region.

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