IMF should have come to emerging markets’ rescue: DSK

International Monetary Fund managing director Dominique Strauss-Kahn says it should have been the Fund, not the Fed and other central banks, which provided swap lines to emerging markets in the crisis
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The International Monetary Fund (IMF) should have been able to step in as the "first responder" to emerging markets when the crisis broke, Dominique Strauss-Kahn, its managing director, said on Friday.

Speaking at the annual Bretton Woods Committee's annual meeting in Washington, Strauss-Kahn said that the Fund should have been able to lend more and faster to emerging market economies, a role that had instead been filled by the Federal Reserve and other central banks, which stepped in to provide liquidity through swap lines. Acknowledging that the central banks had been crucial in putting out "incipient fires", Strauss-Kahn said this was rightfully a job for a multilateral body such as Fund. "[But] what assurances do we have that they (central banks) would be willing and able to provide liquidity support in the future?" he asked.

The IMF introduced a flexible credit line last March and this could be refined by increased by upping its accessibility and duration, Strauss-Kahn said. It would also benefit from collaboration with regional resource pools, he added, which could be a "positive and stabilising force in international financing- as exemplified by recent European Union lending in parallel with Fund programs." The Fund could even serve as a lender of last resort to regional pools, he said.

Over and above measures already taken to support low-income countries, such as waiving interest on loans until 2012, the IMF should consider expanding its guarantees against global shocks for poor countries, Strauss-Kahn said, using climate change as an example of an area in which such an event could occur. Support for poor countries could include "creating a pool of highly concessional money- grants, ideally- that is readily available to top-up or co-finance the IMF's emergency lending," he said. There was no question that the Fund possessed the resources to expand its operations in this way- Strauss-Kahn pointed out that the Fund's resources had exceeded $850 billion over 2009, which would be "sufficient to meet demand in the coming period."

While the greenback had provided a valuable safe haven during the crisis, it was necessary to look for new reserve assets, he said, so that the global economy would not put all of it eggs in a single basket. The Fund's own special-drawing rights, which has been mooted as a contender to the dollar's position by prominent central bankers including Zhou Xiaochuan, the Chinese governor, was in his estimation, not ready to take this role. "But I think it is intellectually healthy to explore these kinds of ideas now- with a view to what the global system might need in the future," he said.

A global risk map
Aside from improvements in how it responded to crisis, the Fund had to work on preventing them, he stressed. This was not a question of supervising individual institutions- rather, the IMF had to continue working with the Financial Stability Map to develop a "global risk map" which would highlight common exposures, cross-exposures and changing patterns in assets and liabilities, Strauss-Kahn said.

The Fund had to be more forthright when advising on capital account liberalisation, he added, noting that it could "certainly do more to provide guidance as to what conditions should be in place before capital liberalisation is launched." The Fund should also advise on right capital controls to deal with problems in the macroeconomy and the balance of payments, he said.

 

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