Defending The Fund

Yet there was no hint of strain in New York last Friday, when he ran through a major public speech, a press conference, and an interview with The Financial Times with panache and some sharp Gallic humour. In the process, he responded for the first time to the big accusations that have been flung at the Fund in recent months.

Why, for instance, did the IMF not see the Asia crisis coming, and could it not have done something to prevent it?

The Fund, he says, did see trouble coming. But it could not persuade the affected countries to act early enough because they were in denial about the problems. A point that is central to analysing the cause of the crisis is the denial syndrome, Camdessus said. The fact was that these countries had been extraordinarily successful for 30 years and more, and had developed a belief in Asian values and an Asian model that gave them a sense of impregnability.

 

Camdessus had visited Bangkok four times in the period leading up to the Thai crisis, on two occasions in secret, in a bid to persuade the authorities that they had to unpeg their currency from the US dollar. But faced with its own political difficulties, the government had hoped for too long that a soft solution could be found with no recourse to the IMF, perhaps by being bailed out by Japan or the US.

Another problem was that the available economic data was hugely unreliable. Camdessus was too polite to say so, but it is now clear that the South Koreans had actively misled western bankers about the liquidity of their reserves and the leverage of their banking system. An improvement in the quality and quantity of such information is central to the IMFs plans for fending off future crises.

Why had the IMF imposed its same old belt-tightening adjustment programs on Thailand, Indonesia and Korea programmes that were quite inappropriate to their present needs?

Here Camdessus became indignant. The new agreements represented a marked departure from the IMFs traditional approach. They were built not on a set of austerity measures, but rather on far-reaching structural reforms to strengthen financial systems, increase transparency, open markets and restore market confidence.

It was true that the agreements had been accompanied by a sharp increase in interest rates. But this had to be seen in the context of a collapse in confidence which had taken Thailand and Korea to within days of running out of reserves.

The first order of business was, and still is, to restore confidence in the currency. It was not part of the IMFs agenda to engineer steep currency deprecations. On the contrary, in our view these currencies have depreciated far more than is warranted or desirable. To reverse this process, countries had to make it more attractive to hold their currency and that required temporary increases in interest rates.

Camdessus also dismissed the notion that the Fund should have taken steps to offset the inevitable slowdown in economic growth, perhaps by leaving room for more expansionary fiscal programmes, or by being less harsh on bust banks. At the start of a crisis, at least, countries needed to toughen up their fiscal positions, to deal with the costs of reconstruction and, where necessary, with the need to reduce the current account deficit. As for the banking system, shareholders had to take their medicine and regulation had to be improved.

The main focus of criticism, though, has been on the issue of moral hazard: the idea that by its interventions the IMF allows borrowers and lenders to escape the full consequences of their recklessness, thereby encouraging others to follow the same course in future. Camdessus says that countries only entered an IMF programme as a last resort: no borrower would voluntarily court the kind of crisis that brought with it such financial, social and political pain.

On the creditors side, he suggested that bankers memories were short. Even a severe lesson, well-deserved, need not have a long-term influence on their behaviour.

Anyway, most investors had taken heavy losses in Asia. It is true that some short-term creditors are being protected, and this is an issue that needs to be addressed. But in the case of Korea, they are being bailed in at longer maturities and below comparable market rates.

Despite this vigorous defence, Camdessus has clearly decided that defending the status quo will not be enough to win the day. So in Fridays speech to the Council on Foreign Relations, he presented what he described as six pillars to support the new architecture of the international financial system.

These included more effective surveillance of economic policies, financial sector reform, and more effective structures for orderly debt workouts.

He emphasised the importance of what he called orderly capital account liberalisation and of the need to ensure that countries had strengthened their banking systems before fully liberalising their capital accounts.

The last thing you must liberalise is the very short-term capital movements, he said, referring to the way Chile had imposed sanctions on short-term capital flows.

In response to questioning, he swiftly added a seventh pillar the need to fight corruption at all levels.

But the final pillar of all is the one that presents him with perhaps the most difficulties: the need he sees to strengthen the international financial institutions, including their financial resources.

An unusual alliance is building up in the US Congress against the IMF and all its works between the left, which sees it as imposing ruthless measures on developing nations, and the right, which hates the way it intervenes in the market system.

What we are doing, argued Camdessus, coincides with the basic purposes of American diplomacy in the world. Among other things, the IMF was helping to reverse declining trends in Africa, to complete the transition of eastern European countries into the market economy and to contain the Asian crisis. And in more than 40 years, it had never cost the US taxpayer a single dime.

This argument may not cut much ice on Capitol Hill. But Camdessus can count on the full-blooded support of the president, of Alan Greenspan, the chairman of the Federal Reserve, and especially of Robert Rubin, the treasury secretary. And when the chips are down, many politicians will be reluctant to cast a vote that could help to reignite the Asian fires. It will be done grudgingly, and with some considerable opposition. But as of today, the betting is that Camdessus will get his votes.