IMF role grows with crisis

• Article
• Comments ()
• Click-2-Listen

By David M. Dickson

The International Monetary Fund, widely dismissed as irrelevant less than 18 months ago, emerged from its annual spring meeting in Washington over the weekend as an integral cog in the efforts of world leaders to overcome the worst global economic and financial crises since the Great Depression.

Its increasing importance was confirmed by the finance ministers of the Group of Seven (G-7) wealthy nations, meeting simultaneously, who spent much of their time trying to nail downcommitments made at the April 2 economic summit in London, where world leaders forged a $1.1 trillion plan to fight the global crises.

Japan was the first wealthy country to write a $100 billion check to the IMF. The United States and the European Union subsequently pledged $100 billion each as well.

The principal beneficiary of this unprecedented funding will be the IMF. Its primary lending program will grow by $500 billion, tripling in size from $250 billion to $750 billion. As recently as last June, the IMF had less than $20 billion in loans outstanding.

In addition to the dramatic increase in the IMF's lending role, IMF Managing Director Dominique Strauss-Kahn emphasized the sentence in the IMF communique "asking the fund to assess regularly the action taken and the action to take, which puts the fund really at the center of the coordination process of economic policy."

As the meetings progressed, protesters upset with how world leaders have handled global economic woes held a rally near the World Bank and the IMF.

Demonstrators gathered Sunday afternoon at Dupont Circle before marching several blocks to a park across from the World Bank building. They held signs that read "Globalized Justice" and chanted, "Obama, don't lie to me. Banks don't bring democracy."

Organizers said participants are outraged that leaders at the Group of 20 summit pledged earlier this month to boost IMF funding.

The IMF reported Sunday that recent increases in the fiscal-stimulus programs by Japan, South Korea and Russia raised the overall stimulus average for the Group of 20 industrialized and developing nations to 2 percent of gross domestic product for this year, thus meeting the goal set by the IMF last year.

The worldwide financial crisis has effectively stopped the flow of capital to many emerging-market and developing nations. Their economies have been hit hard by the biggest decline in world trade in post-war history and by the collapse of prices for their commodity exports.

World Bank President Robert B. Zoellick said Sunday that the economies of developing countries "are being hit by second and third waves of the crisis." He predicted that an additional 55 million to 90 million people will be trapped in extreme poverty this year. "We must continue to act in real time to prevent a catastrophe,"he said.

To help fill the gap between the $300 billion pledged by wealthy countries and the $500 billion goal for additional IMF lending, the IMF for the first time in its history will borrow billions from other countries by issuing IMF-backed bonds. The so-called BRIC countries - Brazil, Russia, India and China - are considering buying those bonds.

But these emerging nations are also demanding an increase in their voting power at the IMF. China, for example, is considering buying at least $40 billion of IMF bonds, which is 8 percent of the $500 billion goal. But China has less than 4 percent of the voting power at the IMF.

Each of the IMF's 185 member nations is assigned a quota, based broadly on its relative size in the world economy. A member's quota determines its maximum financial commitment to the IMF and its voting power, and it has a bearing on its access to IMF financing.

The IMF shocked many last week when it reported that financial institutions in the United States, Europe and Japan would suffer more than $4 trillion in asset write-downs during the 2007-2010 period. Expected write-downs for U.S. institutions jumped to $2.7 trillion, nearly double the estimate last October.

Cleansing the toxic assets from banks' balance sheets and then recapitalizing the banks may require "some countries to nationalize some institutions, some other countries to build a good-bank, bad-bank system and other countries to do something else, and to do it now," Mr. Strauss-Kahn said Saturday after the IMF released its communique. "Recovery is heavily reliant on that."

The IMF projects that the world economy will decline 1.3 percent this year, the first annual contraction since the Great Depression. Studies have shown that downturns caused by financial crises are followed by slow recoveries. "Economic activity should begin to recover later this year amid a continued weak outlook," said a G-7 statement issued over the weekend. "And downside risks persist."