Global Policy Forum

Role Reversal at IMF as the Rich Come Under Fire


By Steven R. Weisman

International Herald Tribune
October 21, 2007

The semi-annual meetings of the world's top finance and banking officials are predictable in one sense: Europeans and Americans often use them to lecture leaders of poor countries about the need to modernize their capital markets, promote transparency and adhere to sound investment standards. What a difference a subprime mortgage crisis can make.

With hundreds of officials and experts convening here over the weekend, the theme this year has not been fear of protesters but of the global impact of the collapse in the American housing sector, which many delegates blame on lax regulations and sleepy regulators in Europe and the United States. "Allow me to point out the irony of this situation," Finance Minister Guido Mantega of Brazil said, noting that "countries that were references of good governance, of standards and codes for the financial systems" were now "the very countries" whose financial problems threatened global prosperity.

In an interview, Trevor Manuel, the finance minister of South Africa, said: "If one looks at the impact of the subprime crisis in the U.S., the losers are poor citizens who tend to be black and Hispanic. But it is also the large banks with an international profile in Europe and the United States that have taken a beating." "It is clear that there was regulatory and supervisory failure," he added. The finance ministers and central bank governors from around the world spent the weekend discussing what they said was "the current episode of financial market turbulence," declaring in a statement that they would continue to "analyze the nature of the disturbances and consider lessons to be learned and actions needed."

But for many, the lessons were already clear. Western regulators had ignored warning signs, Western banks had used exotic off-the-books "conduits" to buy and sell dubious mortgage products, Western rating agencies had gone along for the ride - and now the whole world was suffering from Western excesses. Usually these meetings echo the old debates of what used to be called the north-south dialogue, in which the prosperous countries come to the rescue of the struggling poor countries. A few hundred protesters demonstrating in Washington shouted slogans about exploitation by the wealthy.

This weekend there was a new finger-pointing and perhaps schadenfreude discernible in the statement of the G-24 group of poor countries led by finance ministers of Argentina, Syria and the Democratic Republic of Congo, who noted that "developing countries are a new driving force as well as a stabilizing factor in the world economy." Like other ministers from what used to be called the third world, they blamed the advanced countries' regulations and lack of transparency for the mess.

In response to all this lecturing, Treasury Secretary Henry Paulson Jr. and his top aides fanned out at meeting after meeting to assure the finance ministers that although the impact of the market turmoil had yet to be fully understood or felt, there was no need to panic because the fundamentals of the U.S. economy were sound. "We recognize that there are some issues in the system that need to be addressed," said Clay Lowery, an assistant Treasury secretary for international affairs, cautioning against quick remedies that might be counterproductive. "We want to make sure that there isn't a rush to judgment."

Robert Steel, a Treasury under secretary for domestic finance, told audiences how the department had worked with banks to create a new superfund or "structured investment vehicle" aimed at loosening the credit markets. "The technical organization of this solution is complex," he told the Institute for International Finance, a global association of banks, insurance companies and other institutions. "Initial progress is being made by the lead banks, and participation is expected to broaden in the weeks ahead."

But many listeners were doubtful. Manuel, the South African finance minister, noted that the new fund had already gotten a skeptical response in talks here by speeches over the weekend by Alan Greenspan, the former Federal Reserve chairman, and Michel Camdessus, the former head of the IMF Paulson and Steel said that Washington had already set up advisory panels on auditing and regulations in the financial services industry. But their emphasis was on the industry itself setting up new codes of "best practices," and not on government regulations. "We're making progress, and working our way through the turmoil of capital markets," Paulson said after meeting with the finance ministers of Europe, Canada and Japan. "We've got a ways to go. But we can all come together and say how we can learn from some of the mistakes and make some corrections."

But the idea of voluntary "best practices" was not only getting a cold reception among the developing countries. Many European delegates were skeptical of the Bush administration's approach on the issue, which parallels its call for voluntary "best practices" on regulating hedge funds and "sovereign wealth funds," which are government funds run by China, Russia and oil-exporting countries that have begun to invest heavily in the West. "We can't say this crisis was totally unexpected, but we didn't anticipate how this turmoil would happen, or when or how," Joaquí­n Almunia, the European commissioner for economic and monetary policy, said in an interview. "We may need to adopt some new regulations, but right now our emphasis is on diagnosing the problem."

Much of the anger among developing countries was focused on the IMF, which along with the World Bank was the host of the Washington meetings. Asian and Latin American countries that were rescued after crises in the 1990s, many of them now healthy because of their exports, have paid off their loans to the Fund but are still smarting about the lectures they got and the budget cuts and tax increases they were forced to adopt.

The G-24 developing countries offered a stinging rebuke to the Fund, effectively turning the tables on its leaders and lecturing them for in effect dropping the ball while banks in the West invested recklessly in subprime mortgages using lending facilities that were off their balance sheets. Calling on the Fund to be more "evenhanded" in the future, the finance ministers said it should put as much focus in the future on evaluating the "vulnerabilities" of advanced economies as it does on their own economies.

Fund officials were defensive in their reaction to that unusual rebuke. Rodrigo de Rato, who is stepping down as managing director, said it was unfair to castigate his organization for laxity. Pulling out a paper issued by the Fund last April, he said it proved "we were already clearly stating our concerns" about the situation. Indeed, the paper did warn that "the subprime segment of the U.S. housing market is showing signs of credit quality deterioration" and that the problem could "deepen and spread to other markets.

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