IMF chief backs crisis alert calls

IMF chief backs crisis alert calls

By David Pilling in Tokyo

Published: February 10 2008 19:26 | Last updated: February 10 2008 19:26

The International Monetary Fund can play only a limited – largely analytical – role in spotting brewing financial crises, according to Dominique Strauss-Kahn, the fund’s managing director.

His remarks came as G7 finance ministers, meeting in Tokyo, instructed the IMF to work more closely with the Financial Stability Forum and jointly report on “identifying potential vulnerabilities and enhancing early warning systems”.

The IMF was in a much better position than the thinly resourced FSF to monitor, and possibly prevent, emerging crises in global finance, officials said.

But Mr Strauss-Kahn, speaking to journalists, said: “My opinion is that the specific work to be done by the IMF is mainly in the analysis of linkages between the financial sector and the real sector . . . but obviously the G7 ministers want the IMF to do more than that.”

Defending the IMF’s record, he said a year ago it had identified US subprime lending as a potential flashpoint. But it  was “probably correct to say that the IMF was not vocal enough”.

He was trying to refocus the fund on its “core business of surveillance”. But today’s financial crises were much harder to read than when trade was the main linkage between countries, and economic vulnerabilities quickly showed up in current-account deficits.

Now imbalances could spread through diverse channels, he said, pointing to worldwide falls in asset prices. “Today the linkages are much more complicated. This has to be clearly identified and early warning is absolutely necessary.” On fiscal stimulus, he defended his call for more co-ordinated action despite the cool response at the G7, where ministers stressed their different economic positions. While it was right that countries “were masters of their own policy”, he felt economies representing 20-25 per cent of global GDP – on top of the US’s 22 per cent – “had some room to do something” on the fiscal side.

“It will need some co-ordinated action,” he said, adding that the process was just beginning. “It will be a long way before we have this idea accepted by everybody: that what is good for one country can be good for the world economy.” He was seeking a “correct policy mix . . . a targeted, timely and temporary fiscal response”.

Mr Strauss-Kahn pointed to China, as well as oil and commodity exporters, as economies that could afford to encourage more domestic demand.