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IMF meetings leaves tricky questions unanswered

As the IMF's spring meetings wind up, demands for the lender to set up early warning systems to avert financial crisis have left it facing tough challenges and several unanswered questions.

Finance ministers and central bankers representing the International Monetary Fund's 183 member countries met in Washington from April 26-30. Their top priority at the twice-yearly meeting was to send reassuring signals that a slowing world economy would not dip into a recession.

But a close second on the agenda was the esoteric but equally important debate on how best to reform the IMF and the World Bank to ensure that the world's economy is able to avoid the type of near chaos witnessed during the Asian financial crisis of 1997-1999 that shook the foundations of the global markets.

The meetings proved fruitful and produced a policy shift --the IMF pledged to make crisis prevention and the development of early warning systems its highest priority. The move signalled that the US Treasury Secretary Paul O'Neill has put his mark on the global lender after just a few months in office.

''The IMF needs to work even harder to put crisis prevention at the heart of its activities,'' IMF managing director Horst Koehler said.

''Highest on our agenda should be further work on early warning systems. A stronger focus on crisis prevention should help to reduce the frequency and severity of crisis, as well as the need for more and bigger rescue packages,'' Koehler added.

Financial leaders from the group of seven wealthy nations said in a statement after their weekend gathering in Washington: ''we stress that strong and effective crisis prevention is a top priority. Both the IMF and individual countries should play key roles in this effort.''

The issue has been on the IMF's priority list since the global lender was accused of doing too little to spot the problems that led to the Asian crisis. And more recently, O'Neill has been vocal in saying the fund must spend more time preventing fires rather than putting them out.

Starting with the devaluation of Thailand's baht (currency) in 1997, the crisis eventually ripped through the region and spread as far afield as Brazil and Russia.

It was one of the darkest chapters in the IMF's history. Economies toppled like dominoes as financial markets punished countries for creaky banking sectors, weak exchange regimes and for government corruption and complacency.

The notion that smaller loans and more crisis prevention are positive steps forward is one few would argue with.

''Everybody is in favour of preventing crises; it's like preventing disease or fires in buildings. Everybody knows an ounce of prevention is better than a pound of cure,'' said Arturo Pozecanski, head of emerging markets economics at ABN Amro in New York.

But even if crises are spotting earlier, there remains an almost impossible issue for the Fund to resolve -- what to do with that knowledge.

''They will have to be much more willing to criticise countries, not just in private, which they have been doing forever, but in public,'' he said, adding that it seemed unlikely the IMF would ever be 'brutally frank' in its assessments of member countries' economies.

Since the IMF is a co-operative that acts on consensus, its most cutting comments are usually reserved for private discussions rather than the public arena.

The difficulty the IMF has in criticising its members was highlighted over the past week as Koehler, under pressure from European officials, watered down his earlier comments that Europe's central bank should cut interest rates for the common goal of boosting global growth prospects.

O'neill, who is behind the push for early warning systems at the IMF, has said he would like the lender to act as a whistle blower on nations in trouble that ignore its advice.

That role of the IMF as whistle blower raises another tough question: will alerting markets to weaknesses in places like Turkey or Argentina make matters worse, making an even larger rescue package needed than would otherwise have been the case?

Morris Goldstein of the Institute for International Economics, who has written a book on how to spot economic problems earlier, said the actions taken to bail Turkey out of its economic crises sent mixed signals.

While stating publicly that it wants smaller rescue packages, the IMF has agreed with the World Bank to lend Turkey another $10 billion.

The Turkey rescue is especially notable because the country was bailed out as recently as last December when the IMF tripled its lending to $11.5 billion to help it deal with a crippling banking crisis.

''The key thing in crisis prevention is to make sure creditors make wise lending decisions and that is very hard to do if they feel that they will always be bailed out,'' Goldstein said, noting that the act of giving Turkey another package has reinforced that belief.

''You cannot make real headway on crisis prevention without doing something about private sector involvement,'' he said, adding that the lack of progress on that issue at the IMF meetings was, 'very troubling'.

Some, like Goldstein, fear that multibillion dollar bailouts like Turkey's lead large banks to assume that the international community will ride to the rescue when a country falls into a deep financial crisis.

He said the Turkey rescue proves that the IMF 'will huff and puff and pay out'. He said that O'Neill has to flesh out his vision of the IMF's future, particularly in relation to the private sector's involvement in bailouts.

Over the coming months the IMF will try and tackle some of the issues raised by its new shift in focus, but until some of those questions are answered in more detail, many expect it to remain largely business as usual.

UNI

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