Sunday, September 21, 2008

Sidelined in U.S. crisis, IMF's day may still come

(Reuters) - The International Monetary Fund has been sidelined from the U.S. financial crisis, but that may not be true for long if governments are unable to access international credit.

"The IMF's day will come in this crisis," said Kenneth Rogoff, a former IMF economist now at Harvard University.

"The echoes of this (crisis) are going to be reaching out into the world for some time to come. It's not over by any wild stretch of the imagination, so there is an awfully good chance that the IMF's business is going to pick up for better, for worse, over the next 12 months."

The IMF, which ladled out multibillion-dollar rescue packages to countries facing economic peril, has a mandate to oversee the global financial system and be an early-warning system to markets.

But its warnings about the U.S. crisis have been off-base and inconsistent, raising further questions about its effectiveness in monitoring the global economy.

In April 2007, months before the crisis began, its World Economic Outlook report gave a glowing prognosis for the world's economy. By late July, the fund remained upbeat on world growth prospects, even as the U.S. housing market was unraveling and Bear Stearns hedge funds were failing.

When the IMF did issue warnings, they were often ineffective or ignored by its largest shareholder, the United States, where trouble brewed in the housing market.

Even with the U.S. financial crisis being compared to the Great Depression, IMF Managing Director Dominique Strass-Kahn, a former French finance minister who has been in the job for almost a year, has never given a speech in the United States on the U.S.-led crisis.

"What's going on in the United States is very hard for any external body to exert any leverage," said Rogoff, who was at the IMF at the time of the Brazilian and Argentine crises.

"Things are moving so fast that it's very hard to intervene," he said, noting similar inaction of other agencies like the Bank for International Settlement and Organization for Economic Cooperation and Development.

"The period of acquiescence in international capital markets is over," Rogoff said, "Countries which don't have realistic macroeconomic strategies are going to come unglued."

LENDER OF LAST RESORT

The IMF's response in the current crisis has ignited a fierce debate between IMF staff, management and its Asian members over the even-handedness of the IMF's endorsements of U.S. government's bailouts of institutions and its advice during the 1997/98 Asian financial crisis.

During the Asian crisis, the IMF opposed moves by Asian governments to pump public money to support the capital of ailing financial institutions, which led to a string of bankruptcies and thousands of job losses.

Still bitter toward the IMF, Asian government officials, and some senior staff, have told IMF management that the institution's actions smack of double standards.

The IMF has admitted it made mistakes in the Asian crisis by putting an over-optimistic spin on the likely economic downturn and misjudging the market's response. But it defended the basic thrust of its policy recommendations to the one-time tiger economies of Thailand, Indonesia and South Korea.

The global economic landscape since the Asian financial crisis is now vastly changed, with China and India driving global growth and most Asian governments accumulating massive amounts of foreign exchange reserves to self-insure against returning to the fund for help.

The U.S. financial crisis has also come at a time when the IMF is the midst of a major restructuring of the institution in more than 60 years and some of its longest-serving directors have left or leaving under a buyout plan to cut costs.

"The fund's role is to warn of building problems and to get people to pay attention to them," said Raghuram Rajan, a former IMF economist and a University of Chicago's Graduate School of Business professor. Still, it has "less influence regarding developed countries," he added.

"Once this crisis is over we will have to reconsider how the international agencies might play a role, because of the international impact," Rajan said.

DEEP POCKETS

While the IMF gives advice behind the scenes to countries, said Rogoff, it will avoid coming to the forefront of this crisis unless international capital starts leaving a country and markets dry up.

"The United States still has deep pockets ... so there is no real need to go outside at the moment," Rogoff said. "The U.S. could issue $2 trillion in debt without blinking and there is no country that would come to the fund and ask for the fund's intervention when it had the ability to issue debt like that."

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