IMF Chief Pushes Fund Remake

ISTANBUL -- International Monetary Fund Managing Director Dominique Strauss-Kahn is campaigning at the IMF's annual meeting here to turn the fund into a kind of global central bank with at least $1 trillion it could lend to developing nations in a crisis.

"This annual meeting may be the starting point for a new IMF," he said at an early press briefing and follow-up talks. "And you may say later when you will be talking to your grandchildren that you were in Istanbul at this time."

But a very different reality is taking shape: the IMF is essentially being turned into the staff of the Group of 20, an organization of industrialized and developing nations that doesn't have a headquarters, staff or rules for membership. Essentially, the leaders of the G-20 are functioning as the board of directors of the global economy and need the IMF's help to carry out that role.

 

Reuters

 

From left, IMF Deputy Managing Director John Lipsky, Egyptian finance chief Boutros Boutros-Ghali and IMF Managing Director Dominique Strauss-Kahn in Istanbul on Sunday.

The IMF will analyze plans proposed by G-20 nations to boost growth and monitor whether the nations are carrying them out. Along with the Financial Stability Board, an organization of central bankers and regulators, the IMF will perform similar work on regulatory proposals, including a possible tax on financial institutions to help pay for disposing of troubled firms that would otherwise be considered "too big to fail." The G-20 is also counting on the IMF to develop early warnings of impending asset bubbles and other major problems.

The G-20 finance ministers plan to start figuring out the precise procedures during a November meeting in Scotland.

"We look to the IMF to play a key role in assisting the assessment of G-20 economic and financial policies, and in providing its view on the likely balance and sustainability of the global economy," U.S. Treasury Secretary Tim Geithner told an IMF policy committee.

The evolving structure addresses a continuing political problem for the IMF: Its biggest shareholders often ignore its advice. The IMF pressed China for years to accept that its currency was dangerously undervalued -- and then the fund backed off to smooth relations with Beijing. The U.S. has dismissed IMF recommendations on banks.

Now the G-20 will handle the politics of the global economy, largely by member countries peer-reviewing each other's policies -- and pressing countries to stick to their pledges. In the case of China, that means relying less on exports -- and by implication letting its currency appreciate -- and in the case of the U.S. cutting its long-term debt. The G-20 "will give a political edge to some of the stuff that takes place at the IMF," said British Chancellor of the Exchequer Alistair Darling.

One growing dispute was on sharp display in Istanbul. At a separate meeting, Deutsche Bank AG Chairman Josef Ackermann complained that new layers of regulation being considered by G-20 nations could choke off growth. Messrs. Geithner and Darling dismissed the banker's warning. "That isn't anything like the greatest risk we face today," said Mr. Geithner.

The IMF's staff role also could relieve political pressure on the G-20 by nations that aren't members of the club. Egyptian Finance Minister Boutros Boutros-Ghali, who chairs the IMF's policy committee, said, "What's the role [at the G-20] of the [IMF's] other 165 nations? That's two billion people" being left out. He said that he thought those members would be satisfied if the IMF's staff working for the G-20 went through the IMF's regular channels -- for instance, presenting documents for review to the fund's executive board, which represents all IMF members.

But Israeli central banker Stanley Fischer, a former IMF deputy managing director, said deeper change is needed. Eventually, he said, the G-20 should become the governing board of the IMF and have the responsibility of representing the IMF's other members. That way, "the role of the G-20 in setting [the] global work agenda" would be enhanced.

The shift in global institutional power was reflected on another front. The finance ministers of the Group of Seven leading nations -- the U.S., the U.K., Canada, France, Italy, Germany and Japan -- met as they regularly do before the IMF meeting. In the past, those sessions have sometimes overshadowed the IMF. This time, the G-7 played a low-key role.

A G-7 statement repeated word-for-word an earlier admonition that China let its currency appreciate. Then finance ministers from the seven countries spent much of their briefing time saying that the G-7 wouldn't go out of business, if only because the group discusses currency issues, something the G-20 hasn't done -- so far.

The G-7 statement didn't say a word about Mr. Strauss-Kahn's grand plans for the IMF, and European Central Bank governing-council member Axel Weber was especially skeptical. "The IMF is no global institution that could manage the currency reserves of the central banks," he said.
But Mr. Strauss-Kahn said he had made progress in winning support for his idea. He noted that Mr. Boutros-Ghali's policy committee said that the IMF should "review its mandate" and had approved a study of whether "there is a need for enhancing financing instruments." That "opened the door" for further examination of his proposal, he said.

- Via Wall Street Journal