The world must
act quickly,
forcefully and
cooperatively to
contain the
ongoing
financial and
economic
downturn,
Dominique
Strauss-Kahn,
Managing
Director of the
International
Monetary Fund (IMF),
said today in an
address at the
Peterson
Institute for
International
Economics.
Speaking at the
institute's "The
Euro At 10: the
Next Global
Currency?"
conference, Mr. Strauss-Kahn
noted that
turmoil in
financial
markets has
become a crisis
of confidence,
requiring
decisive
government
intervention. "What
will restore
confidence is
government
intervention
which is clear,
comprehensive
and cooperative
among countries,"
he said. "The
private sector
cannot restore
confidence on
its own.
Macroeconomic
policy measures
by governments
will not restore
confidence on
their own.
Piecemeal
measures on
financial
markets will not
restore
confidence on
their own," he
added.
To help the
financial
markets
stabilize and
confidence
return, Mr.
Strauss-Kahn
highlighted four
sets of actions
built on a
foundation of
government
accountability:
Explicit
public
guarantees of
financial system
liabilities:
The fragility of
public
confidence has
reached a point
where explicit
public
guarantees of
financial system
liabilities,
which will be
temporary and
with safeguards
measures, is
unavoidable.
This would cover
not only retail
bank deposits
but probably
interbank and
money market
deposits, so
that activity
may restart in
these key
markets.
Government
purchases of
troubled assets
to force loss
recognition: Governments
need to
eliminate
troubled assets
by purchasing
them at fair
value. This will
force the
recognition of
losses by the
financial
institutions.
Capital
injections by
governments:
As private money
is scarce in
today's
environment,
government
support is
needed. One
strategy that
has worked in
past crises is
to match new
private capital
subscriptions
with government
capital, which
imposes a market
test for the use
of public funds.
A high
degree of
international
cooperation:
During the past
week the
collapse in
confidence in
the markets has
been almost
matched by a
collapse in
confidence
between
countries. This
has promoted a
trend toward
unilateral
measures taken
with national
interests in
mind, and with
unintended "beggar-thy-neighbor"
consequences for
others.
On global
macroeconomic
conditions, Mr.
Strauss-Kahn
warned of the
longer-term
effects that the
current market
crisis will have.
In the United
States,
households and
businesses may
have a healthier
attitude to risk,
but there may be
a need for
macroeconomic
policies to
support the
economy if both
private
investment and
consumption
weaken in the
near term.
Western Europe
has also been
hit hard. Mr.
Strauss-Kahn
pointed out that
while the region
has not
encountered a
major foreign
exchange crisis
owing to the
success of the
euro, European
countries still
face significant
challenges in
dealing with the
current
financial crisis.
On the
emerging
economies, Mr.
Strauss-Kahn
said that
although many
emerging
economies are in
a better
position than in
the past, they
are still at
risk due to high
external
financing needs
and in some
cases banking
system
fragilities.
While the
authorities
should take
measures
tailored to
their
circumstances,
the IMF will be
ready to provide
timely financial
support for
emerging
economies, if
needed, Mr.
Strauss-Kahn
said.
"We will
activate
emergency
procedures to
respond quickly
to urgent
requests, with
high access
financial
programs based
on
conditionality
that focuses on
crisis response
priorities."
Mr.
Strauss-Kahn
also underlined
the impact of
high food and
fuel prices on
the developing
countries. "In
many developing
countries, the
most urgent
crisis is not
what is
happening in
financial
markets but what
has happened in
commodity
markets. We must
not forget this
other crisis,"
he said. While
the authorities
have policy
options to
consider to
mitigate the
impact, Mr.
Strauss-Kahn
emphasized that
the IMF and the
World Bank are
ready to help
with policy
advice,
technical
assistance and
financial
support. He also
urged donor
countries under
fiscal
constraints not
to cut foreign
aid for the most
vulnerable in
the world.
Turning to
the lessons to
be drawn from
the crisis, Mr.
Strauss-Kahn
highlighted the
need to
strengthen the
regulation and
supervision of
the financial
sector, and to
press ahead with
reform of the
international
financial
architecture.
"The crisis
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 also a
failure in
market
discipline
mechanism," he
said, adding
that in
remedying these
shortcomings, "I
think the IMF
can help to
coordinate this
effort, drawing
on the expertise
of others."
Reform of the
international
architecture
will call for
enhancing the
legitimacy and
effectiveness of
the system. "Legitimacy
must be
conferred by
reliance of
broader groups.
One very simple
change that
could be made is
to extend the G8
to at least
China, India and
Brazil, and
perhaps others.
But I think this
needs to be
accompanied by
greater reliance
on multilateral
institutions
with near
universal
membership, so
that no country
that wants to
participate in
the
international
system is left
out."
Effectiveness,
he added, can be
achieved by
better
coordination
between
international
organizations
and better
follow up on
international
agreements.
