IMF reserves plan contested

06/10/2009 | Thierry Ogier, Anthony Rowley, Sid Verma

Policy-makers question forex pool plan

The IMF’s bid to create a global pool of currency reserves – which would take it a step closer to becoming a global central bank – came under attack yesterday from policymakers.

The plan is “a move in the right direction”, but “won’t solve the problem” of global financial imbalances, former World Bank chief economist Joseph Stiglitz told Emerging Markets.

Guillermo Ortiz, Mexican central bank governor and chairman of the Bank for International Settlements board, suggested that groups of countries might prefer to create “regional pools” of reserves instead.

Brazilian central bank Governor Henrique Meirelles said the Fund could have a role in providing countries with self-insurance, but that the bureaucratic and political hurdles of access in the event of a crisis could derail the project.

“The moment when you have to use it, and in which quantity, you will have to discuss with other countries – and that would be difficult”, he said.

These comments came in the wake of IMF managing director Dominique Strauss-Kahn’s proposal for the Fund to supervise a global pool of reserves, which he said would “avoid countries including China having to build up such big reserves”.

The reserves built up by China and other nations act as “self insurance” against abrupt reversals of private capital from emerging markets during a crisis. The Fund’s hope is that a well-capitalized IMF could be a suitable alternative.

Strauss-Kahn and other officials are seeking to persuade the major reserve-holders to abandon “self insurance” and make use instead of the IMF’s new Flexible Credit Line which provides them with conditionality-free lines of credit that could substitute for reserves.

But Stiglitz warned in an interview in Istanbul yesterday that for Strauss-Kahn’s proposal to work, the Fund would have to be seen as a credible form of insurance by offering “automatic access on a permanent basis” to funds.

The Fund would have to throw conditionalities out of the window, to give member states confidence that foreign exchange would be available. “If you are a developing country today, maybe the IMF approves of my policies now? But will they approve of [disbursement of] my reserves in five years?”

The US’s power of veto in the Fund would present obstacles. “The US might have a new president” who is more “popular”, but “with the US having veto power at the Fund” countries will not entrust their precious foreign exchange coffers to the Washington-based institution, Stiglitz warned.

The chairman of the China Banking Regulatory Commission, Liu Mingkang, told Emerging Markets last night that China’s finance ministry and the People’s Bank of China are “having some good conversations with the IMF” at present on the reserves issue. But he refused to be drawn on what the outcome might be.

Ortiz of Mexico – which has a $47 billion flexible credit line with the IMF earlier this year – told Emerging Markets yesterday: “We should think about this type of contingent facilities to provide countries with contingent buffers at a relatively low cost.

“You could extend that concept to reserve pooling. .. so the membership could feel protected in case of unexpected shocks at a reasonable cost. That way you are playing an increasing role of a lender of last resort.”

The G30 grouping yesterday called for an extension of the IMF’s flexible credit lines to boost liquidity but stopped short of calling for a revamp of the lender into a de facto global central bank.

Jose Viñals, director of the IMF’s monetary and capital markets department, asked whether a bid by Asian nations to create an Asian Monetary Fund to pool the region’s reserves would be a competitor, said: “In a global world you need global insurance and having just regional insurance would be ineffective relative to global insurance.”

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