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Press Release: IMF Managing Director Strauss-Kahn Urges Quick, Forceful, and Cooperative Actions To Tackle the Global Economic and Financial Downturn
October 10, 2008
Press Release No. 08/245
The world must act quickly, forcefully and cooperatively to contain the ongoing financial and economic downturn, Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), said today in an address at the Peterson Institute for International Economics.
Speaking at the institute's "The Euro At 10: the Next Global Currency?" conference, Mr. Strauss-Kahn noted that turmoil in financial markets has become a crisis of confidence, requiring decisive government intervention. "What will restore confidence is government intervention which is clear, comprehensive and cooperative among countries," he said. "The private sector cannot restore confidence on its own. Macroeconomic policy measures by governments will not restore confidence on their own. Piecemeal measures on financial markets will not restore confidence on their own," he added.
To help the financial markets stabilize and confidence return, Mr. Strauss-Kahn highlighted four sets of actions built on a foundation of government accountability:
Explicit public guarantees of financial system liabilities: The fragility of public confidence has reached a point where explicit public guarantees of financial system liabilities, which will be temporary and with safeguards measures, is unavoidable. This would cover not only retail bank deposits but probably interbank and money market deposits, so that activity may restart in these key markets.
Government purchases of troubled assets to force loss recognition: Governments need to eliminate troubled assets by purchasing them at fair value. This will force the recognition of losses by the financial institutions.
Capital injections by governments: As private money is scarce in today's environment, government support is needed. One strategy that has worked in past crises is to match new private capital subscriptions with government capital, which imposes a market test for the use of public funds.
A high degree of international cooperation: During the past week the collapse in confidence in the markets has been almost matched by a collapse in confidence between countries. This has promoted a trend toward unilateral measures taken with national interests in mind, and with unintended "beggar-thy-neighbor" consequences for others.
On global macroeconomic conditions, Mr. Strauss-Kahn warned of the longer-term effects that the current market crisis will have. In the United States, households and businesses may have a healthier attitude to risk, but there may be a need for macroeconomic policies to support the economy if both private investment and consumption weaken in the near term. Western Europe has also been hit hard. Mr. Strauss-Kahn pointed out that while the region has not encountered a major foreign exchange crisis owing to the success of the euro, European countries still face significant challenges in dealing with the current financial crisis.
On the emerging economies, Mr. Strauss-Kahn said that although many emerging economies are in a better position than in the past, they are still at risk due to high external financing needs and in some cases banking system fragilities. While the authorities should take measures tailored to their circumstances, the IMF will be ready to provide timely financial support for emerging economies, if needed, Mr. Strauss-Kahn said.
"We will activate emergency procedures to respond quickly to urgent requests, with high access financial programs based on conditionality that focuses on crisis response priorities."
Mr. Strauss-Kahn also underlined the impact of high food and fuel prices on the developing countries. "In many developing countries, the most urgent crisis is not what is happening in financial markets but what has happened in commodity markets. We must not forget this other crisis," he said. While the authorities have policy options to consider to mitigate the impact, Mr. Strauss-Kahn emphasized that the IMF and the World Bank are ready to help with policy advice, technical assistance and financial support. He also urged donor countries under fiscal constraints not to cut foreign aid for the most vulnerable in the world.
Turning to the lessons to be drawn from the crisis, Mr. Strauss-Kahn highlighted the need to strengthen the regulation and supervision of the financial sector, and to press ahead with reform of the international financial architecture.
"The crisis is the result of three failures: a regulatory and supervisory failure in advanced economies; a failure in risk management in the private financial institutions; and also a failure in market discipline mechanism," he said, adding that in remedying these shortcomings, "I think the IMF can help to coordinate this effort, drawing on the expertise of others."
Reform of the international architecture will call for enhancing the legitimacy and effectiveness of the system. "Legitimacy must be conferred by reliance of broader groups. One very simple change that could be made is to extend the G8 to at least China, India and Brazil, and perhaps others. But I think this needs to be accompanied by greater reliance on multilateral institutions with near universal membership, so that no country that wants to participate in the international system is left out." Effectiveness, he added, can be achieved by better coordination between international organizations and better follow up on international agreements.
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