Global Policy Forum

In a preemptive move aimed at helping it spot crises in emerging economies sooner, the International Monetary Fund said on Friday it would set up a new International Capital Markets department. The widely-expected move is hoped to help the Washington-based lender spot liquidity crunches in countries like Turkey and Argentina before they have a crippling effect that would require bailouts costing billions of dollars.

Ever since the Asian financial crisis, which started in Thailand in 1997 before rocking the region and spreading as far afield as Brazil and Russia, IMF critics have accused the lender of being too slow to spot problems. The new department, along with a raft of earlier reforms, also addressees a key concern of new US Treasury Secretary Paul O'Neill, who is keen to see the fund develop into a more pro-active organization than it has been in the past.

The fund said in a statement that the new department will offer it greater surveillance of capital markets around the world allowing it to not just spot problems earlier, but also to manage crises when they do occur. The new unit will take staff and operations from three existing IMF departments. New responsibilities will include developing closer relationships with major commercial banks.

Wall Street traders often complain that the IMF is too rarefied and does not have a firm grasp on the realities of the day-to-day vagaries of financial markets. The new department will also work on conceptual work about improving the international financial system and access to capital markets by member countries. ''I see this Department as a vital part of the ongoing efforts to strengthen the international financial architecture, and in particular to strengthen the fund's role in crisis prevention,'' IMF Managing Director Horst Koehler said in a statement. ''With this move, the fund is sending a clear signal that it is serious about its commitment to being a center of excellence for work on financial markets issues,'' he added.

Mr. Koehler said he hopes to appoint a head for the unit with the appropriate professional background and experience as soon as possible. The move follows the recommendations of an independent panel commissioned by Mr. Koehler to see how the fund could improve its understanding of capital markets. Earlier this week, Mr. O'Neill alluded to the IMF doing a better job spotting problems. ''If we in the world do our work well, that there will be less fire-fighting and more polishing the fire engines because we will anticipate difficult situations in countries that could result in a financial unwinding of affairs in a particular country,'' Mr. O'Neill said. Indeed, the straight-talking Treasury secretary said that in the last 20 years, few financial crises came as much of a surprise to people who pay attention to such matters.

''And that tells me that it is possible with the right kind of intelligent application of ideas to anticipate and to take action to make sure that we don't have a fire,'' he said. The new department should make Mr. O'Neill feel more confident that the IMF is at least covering all the bases and that if a crisis does occur, that it made a full effort to spot it. Since the Asian crisis, the IMF has made a whole host of changes after a number of savage debates in the US Congress when it needed increased funding.

Among those changes are higher interest rates to encourage countries to become less reliant on IMF funds, precautionary loans to protect countries with good policies from suffering as a result of crises elsewhere, more transparency at the fund itself and audits of all countries receiving IMF cash in an effort to ensure the money it used for the right purposes.

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