Lagarde calls for more defences against crisis in emerging markets

The world needs "further lines of defence" against a possible emerging markets crisis but the International Monetary Fund (IMF) stands ready to provide financial support if needed, its managing director Christine Lagarde said yesterday.

Her remarks to the Kansas City Fed's annual gathering in Jackson Hole, Wyoming, are a sign of growing concern among international policymakers about market turmoil in countries such as Brazil, India and Indonesia.

“Even with the best of efforts, the dam might leak,” Ms Lagarde was due to tell the central bankers gathered for the conference, according to a text of her speech released by the IMF. “So we need further lines of defence . . . that reflect our interdependence, our common purpose, and our mutual responsibility for the global economy.”

Ms Lagarde did not mention any specific country, suggesting that no action is imminent. But her reference to the Fund’s tools suggests that she thinks they may be needed if problems in emerging markets get worse.

The Indian rupee, the Brazilian real, the Turkish lira, the South African rand and Indonesia’s rupiah have all weakened substantially since May, prompting a variety of responses from governments and central banks.

Brazil and Indonesia have moved to stem the declines in their currencies and shore up confidence at the end of a torrid week for emerging markets, where local borrowing costs hit a two-year high.

Brazil’s central bank said late on Thursday it would launch a currency intervention programme worth about $60 billion (€45 billion) to ensure liquidity and reduce volatility in the nation’s foreign exchange market.

Then yesterday, the Indonesian government said it would increase import taxes on luxury cars, introduce tax incentives for companies investing in agriculture and metals industries and aim to reduce oil imports. The move suggests Jakarta may have given up on trying to shore up its currency through intervening in the markets.

The potential tapering of Fed asset purchases from $85 billion a month has pushed up US interest rates and led to falling currencies in emerging markets as capital flows back to the developed world.

– (Copyright The Financial Times Limited/Bloomberg)