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Wednesday October 7, 01:40 PM
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ANALYSIS - IMF eyes currency reserves as its power expands
By Lesley Wroughton
ISTANBUL (Reuters) - The International Monetary Fund is honing in on problems posed by huge currency stockpiles in exporting nations as it takes up the baton of a global governor charged with bringing about a better-balanced world economy.
The Group of 20 economic powers last month and other nations at meetings here in recent days have pushed the global lender to make sure the world never again faces a crisis like no other since the Great Depression.
While the global recession has its roots in both a debt-fueled housing boom in the United States and the free-lending ways of an export-rich China, the IMF is beginning its task by focusing on the latter half of the equation.
"People are worried about the accumulation of reserves and the implications it will have down the road," said a senior IMF official, who requested anonymity. "It is a prevention issue right now, rather than proactively changing the way people are investing their reserves."
The initial focus reflects the fact once spendthrift U.S. consumers, whose wealth has evaporated as the value of their homes have plummeted, have already largely shut their wallets.
"The responsibility for powering the global growth engine will fall on other countries, particularly those that relied in export-led growth," IMF chief Dominique Strauss-Kahn said.
Strauss-Kahn called upon the IMF's 186-member nations to strengthen the lender's hand by increasing the amount of capital it can deploy in times of crisis by perhaps $1 trillion or more. He argued this would dissuade countries like China from building big currency war chests because they would know the IMF could come to their aid in times of need.
If such a proposal worked as planned -- and it is only in the discussion stage as yet -- these countries could redirect this money into their own economies, boosting domestic demand and carrying more of the burden of global growth.
Brazil offered perhaps the most radical view for a remade IMF. Brazil's finance minister, Guido Mantega, said he envisions the IMF playing a central bank-like role in which it provides liquidity and currency swaps to nations in need.
DISTRUST RUNS DEEP
Even though a consensus appears to have emerged to give the IMF a bigger role in preventing crises, it is far from clear member nations will decide to strengthen its global lender of last resort role. In the past, many have chafed under the painful conditions that have accompanied IMF loans.
And with the Fund still dominated by the United States and European nations, emerging markets have doubts about whether they can trust the lender to be there when a crisis hits.
Behind closed doors, some countries expressed hesitation at pumping more money into the IMF if there were no safeguards governing how it would be lent.
Mexico's central banker Guillermo Ortiz, like some other policymakers, thinks regional reserve pools, similar to the Chaing Mai Initiative for Asian nations, would be better.
For the IMF to win the role, it must convince advanced economies to shift some of their voting power to underrepresented countries by a January 2011 deadline in order to build trust with emerging market nations.
"The authority of the Fund depends on the respect that the Fund enjoys," former Bank of Israel Governor Jacob Frenkel said. Frenkel and Ortiz are members of the Group of 30, a group of prominent bankers, policymakers and economists, who are pushing for expanding the IMF's mandate.
CHINA WANTS FOREX POLICEMAN
IMF member countries have asked the Fund to study over the next year ways to help governments cope with balance of payments problems, financial volatility and the excessive buildup of unproductive currency reserves.
Tackling these problems means changing the behavior of the world's major economies and ensuring policies are synchronized.
China, which has invested the vast bulk of its $2 trillion reserves in U.S. dollar assets, said it wants the Fund to pay closer attention to not only policy implementation but capital flows so it can "promote relative stability of the exchange rates of major reserve currencies."
It made clear, however, that it felt the IMF should not focus criticism on China's yuan, which many economists believe is undervalued and gives Chinese exporters an edge in global trade, as it assesses economies around the globe.
"It should not simplistically, mechanically assess individual policies," Yi Gang, China's central bank vice governor, said during the IMF meetings.
Cornell University professor Eswar Prasad, a former senior IMF official, said it is not yet clear whether the Fund will have the wherewithal to take on powerful member countries when disagreements emerge.
"It will be interesting to watch how forcefully the Fund takes on its major shareholders and how it responds to the inevitable push back when it critically evaluates their policies," he said.
(Reporting by Lesley Wroughton; Editing by Tim Ahmann)
