For some, anyway, the global financial crisis definitely has a silver lining – not least for Dominique Strauss-Kahn, who was described last July as France’s own “Comeback Kid”.
Now, the man who earned his reputation as a “champagne socialist” and recovered from French political misfortune to nab the directorship of the IMF, has cast himself as the saviour of emerging markets amid the global financial meltdown.
After announcing Thursday that the Fund would use a “rapid-fire” emergency-loan programme to lend hundreds of billions of dollars to emerging markets economies to help protect their bonds, some are already hailing him for bringing the IMF back to relevancy – and possibly giving the institution a central role in the global economy.
The programme could distribute a record amount of cash, as the cost of protecting bonds issued by various developing countries has climbed sharply and nations such as Brazil, Mexico and Peru have sold dollars to shore up their currencies, reports Bloomberg on Friday.
Demand for IMF assistance from emerging economies had collapsed in the past few years as buoyant capital markets and rising commodity prices allowed many developing nations to raise funds on their own and build up currency reserves. Now central banks around the world are drawing on those reserves as the credit crisis spreads, the report notes.
Commenting on Strauss-Kahn’s initiative, Claudio Loser, a scholar at Inter-American Dialogue, said the IMF “had been written off as increasingly irrelevant”, noted Bloomberg. But, “now we could see a renaissance at the fund. Countries that had hoped never to need the fund again may be forced to ask for help as the normal sources of finance dry up.”
Strauss-Kahn announced the plan on the eve of the IMF’s annual meeting this weekend in Washington. The EM programme will allow the Fund’s 184 member nations to get loans in 10 days or less, rather than the usual several weeks it takes to process requests. Conditions the fund typically requires, such as cutting government spending, will also be less burdensome.
The IMF had $110.2bn in outstanding loans at its peak as of Dec 31, 2003. That had fallen to $17bn as of Sept 30. “The fund did not lend a lot during the last five or six years,” Strauss-Kahn said. “We have hundreds of billions of dollars which are likely to be used in one year, and even more if we go over this period.”
While stricken countries such as Iceland are now eyeing IMF assistance (Iceland’s PM Geir Haarde said this week an IMF loan was “definitely an option” and an IMF mission is in the country now), and battered banks and other institutions are scrambling for funds to stay afloat, it must give Strauss-Kahn extra satisfaction to be able to announce having “hundreds and billions of dollars – or even more” to dispense.
Here, for the record, are the latest utterances from the IMF, including points in its latest World Economic Outlook report, which has been given much prominence this week.
Inflation “risks are diminishing rapidly” in advanced economies, the Fund said in its latest World Economic Outlook, while “continued pressures from the adjustment to high commodity prices” keeps the inflation risks high in developing countries.
The Fund reduced its forecast for global growth next year by nearly a full percentage point, compared with its previous projection in July, with expected US growth for 2009 cut by 0.7 of a percentage point to 0.1 per cent – hovering just above a “full recession” of a year-on-year fall in growth rather than the narrower definition of “technical recession” of two successive quarters of a shrinking economy. Predicted growth for the eurozone in 2009 was cut by a percentage point to an increase of 0.2 per cent.
Separately, Olivier Blanchard, the Fund’s chief economist, said this week that the chance of another Great Depression was “nearly nil”, although the IMF has said the US and European economies were mainly already in or close to recession.
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the Fund said. “The situation is exceptionally uncertain and subject to considerable downside risks.”
Global growth is likely to slow to 3.9 per cent this year and 3 per cent in 2009, sharply down from the 5 per cent growth recorded last year, according to the IMF report. Some economists regard 3 per cent or 2.5 per cent global growth as equivalent to a world recession, given the trend rates of growth in the global economy, but Blanchard said that such definitions were “unhelpful”.