Global Policy Forum

By Robert Weissman

The number two at the International Monetary Fund (IMF) on Sunday recommended that the organization expand its role as a lender of last resort.

Speaking at a joint luncheon of the American Economic Association and the American Finance Association, Stanley Fischer said the IMF could take steps in that direction by inviting "private sector involvement in the solution of financial crises." Fischer, the IMF's first deputy managing director, cited the approach taken by nations such as Argentina that have established "precautionary lines of credit from private sector lenders." "This is a useful supplement to the holding of reserves, and could possibly be cheaper than increasing reserves," Fischer said, noting that he was expressing his views and not those of the IMF.

Fischer also said that the IMF's Executive Board had agreed it could "lend to countries in arrears to private creditors, provided they are pursuing appropriate policies and making good faith efforts to cooperate with the creditors." He added that requiring banks or creditors to share in the financing of IMF programs "would be destabilizing for the international system." "If such a condition were insisted on, the creditors would have a greater incentive to rush for the exits at the mere hint of a crisis," he said.

Crises over the last five years have revealed major flaws in the structure of the interna-tional economy, Fischer said, and economic leaders must now urgently consider solutions such as "the further development of the role of the international lender of last resort."

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