IMF boss says international cooperation key

| 13/10/2008

(CNS): Comparing the current financial crisis to the great depression of the 1930s Dominique Strauss-Kahn, Chairman of the Executive Board and Managing Director of the IMF has said the world today is a very different place with tools to manage markets and economies and to succeed he said the world must do three things — act quickly, act comprehensively and co-operate.

“An upsurge of nationalism was one of the worst consequences of the great depression, but it was also one of its causes,” said Strauss-Kahn. “European countries argued with each other instead of finding solutions to their common problems. The United States gave a low priority to trade, and favoured tariffs. We can act cooperatively. This weekend the IMFC, representing 185 countries, endorsed an action plan formulated on Friday by the G7. The centre piece of this plan is a stronger than ever commitment to use all available tools to support systemically important financial institutions. The plan outlines specific mechanisms that countries can use to support the system, jump-start credit, and restore confidence.”

Speaking to the Board of Governors of the IMF at the Joint Annual Discussion, 2008 Annual Meetings of the IMF and the World Bank Group in Washington DC, on Monday 13 Octoberhe stressed that promoting international monetary cooperation is the very first responsibility of the IMF.

“International cooperation has not been good enough. Until this weekend, 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. Now things are beginning to turn around. Last week we saw coordinated moves by major central banks. This weekend we have gone much further: we have a G7 plan which envisages action on all of the major financial market issues; we have the endorsement of that plan by the entireinternational community; and, last but not least, we have an action plan in the euro zone,” he added.

However Strauss-Kahn said there was still some way to go and countries must talk to each other about policies, and consider the effects of the actions on partners. He said there was a need to deploy all of the instruments of modern macroeconomic policy to limit the damage to the real economy.

“The most obvious use of fiscal policy is precisely to ease pressures where they are greatest: in the financial and housing sectors. But governments that can afford it should also be ready to undertake a broader fiscal stimulus,” the Directed stated.

“Emerging economies have differing degrees of freedom to act. Some can afford to draw reserves down to finance a temporary and sudden shortfall in capital flows. Others will need to raise policy interest rates in line with rising risk premia to stem outflows and bolster confidence in their currencies. Some may need help, and possibly very substantial help.”

He explained that the IMFC called on the Fund to offer financial support to members that need it, and that it has activated emergency procedures to respond quickly to urgent requests, with high access financial programs, based on streamlined conditionality that focuses on crisis response priorities.

‘Developing countries need help too. They face reduced export demand and reduced access to trade credit. And many are already suffering from the other crisis—the food and fuel crisis that has strained budgets and balances of payments, and raised inflation and living costs,” he added stating the fund and the World Bank would support those countries with advice, technical assistance and financial support. He said despite the circumstances it was very important that donors do not respond to the crisis by cutting aid to the poorest and most vulnerable people in the world.

When it came to learning lessons he said the crisis in financial markets is the result of three failures: a regulatory and supervisory failure in advanced economies; a failure in risk management in the private financial institutions; and a failure in market discipline mechanisms.

“Preventing a recurrence of these failures will require an international effort, because borders do not confine financial institutions or keep out financial turmoil,” Strauss-Kahn added. “We need greater reliance on multilateral institutions with near universal membership, so that all countries that are affected by crises have a voice in resolving them.”

He said it would be dynamic reform that will produce results over time.

“We can emerge from this crisis so long as we act quickly, comprehensively, and cooperatively. The Fund will do its part. But much will depend on you: finance ministers and central bank governors, representatives of your countries, to take the actions needed to restore confidence and stability,” he said adding that when the board next met he hoped that it would be said this was when the international recovery began, because the nations of the world, chose to act together.

 

 

 

 

 

 

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