Financial crisis puts monetary fund in the driving seat again

ANALYSIS:The pre-eminence of the G20 could have implications for how the IMF is organised, writes PAT McARDLE

LAST APRIL Garret FitzGerald warned that rejection of the Government’s banking or budgetary proposals “could throw our state into the hands of the IMF”. Yesterday, Ken Clarke, UK shadow business secretary, prompted controversy when he said the IMF might have to be brought in to rescue the UK in the event of a hung parliament.

The quotes illustrate the “bogeyman” nature of the International Monetary Fund (IMF), which holds its spring bi-annual meeting this weekend in Washington.

Officially established in December 1945 at a conference in Bretton Woods, New Hampshire, the IMF began operations on March 1st, 1947. It began with a clash of views. The US proposal, which won out, favoured price stability while the British one – drafted by JM Keynes – which wanted some emphasis on growth, was defeated. For the first time in 65 years, a rerun of this debate is conceivable as the composition and influence of the fund members changes radically.

The economic crisis is a godsend to the IMF. It was preceded by a period of stability and low interest rates which meant that developing countries could borrow on the capital markets, had no need to resort to the IMF and even less desire to go near it. Many felt that the fund had failed to carry out its role as steward of the international monetary system. US economist Barry Eichengreen described it as “a rudderless ship, adrift on a sea of liquidity”.

The upshot was a severe downsizing. In 2008, the fund took a dose of its own medicine and reduced its 2,900 staff by 14 per cent.

Now all is changed, and the IMF is back in the driving seat, sending missions here, there and everywhere. It sent a very strong team to Ireland last year, including Steven Seelig who previously ran the Federal Deposit Insurance Corporation, the US version of Nama.

Its funds, which are contributed by the 186 members under a quota system, have been more than doubled; it has been involved in major rescues in Iceland and Hungary as well as a range of smaller states.

More recently, new ground was broken when it became involved along with the EU in putting together a rescue package for Greece, the first time this happened in the euro zone.

The IMF has been to the forefront in commenting on the impact of the financial crisis. Admittedly, its forecasts for bank losses were too pessimistic and had to be pared back more than once. It was also too negative on growth prospects.

More worryingly, a certain erraticism has begun to appear. A former IMF economist has criticised the Irish response to the crisis on a number of occasions; this would have been unthinkable in the past. Its current chief economist, Olivier Blanchard, made headlines recently when he proposed relaxing the target central bank inflation rate to lessen the chances of another recession. This led the ECB, in turn, to disparagingly refer to the IMF as “inflation creators”.

As usual, there will be tensions at the Washington meetings this weekend. One of the bigger issues, which will be debated behind closed doors, will be the quota system which determines contributions to the fund and, critically, voting rights.

Traditionally, the Group of Seven (G7) – France, Germany, Italy, Japan, Britain, the US and Canada – ran the show and still control the voting. However, history was made recently when the G20 became pre-eminent. The latter comprises 19 countries plus the EU and represents 85 per cent of global GDP. The new additions are Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

The coming of age of the G20 was heralded last September with the statement “Today, we designated the G20 as the premier forum for our international economic co-operation.”

They agreed an ambitious programme: to avoid premature withdrawal of stimulus; plan their exit strategies; launch a “framework for strong, sustainable and balanced growth”; strengthen financial regulation, via reformed rules on capital adequacy and remuneration of bank employees; reform the global institutional architecture, including reallocation of quotas in the IMF; phase out fossil fuel subsidies; “bring the Doha round to a successful conclusion in 2010”; and reach agreement in Copenhagen on climate change.

They missed out on volcanic ash though some of their other objectives look just as challenging as the clouds that have engulfed us of late. However, there is no doubt that the focus this weekend will be on the G20. The world has changed; the financial crisis was merely the catalyst. The IMF may once again be in the driving seat – but are the rules of the road about to change?