Transcript of a Press Conference by IMF Managing Director Dominique Strauss-Kahn on the Launch of a New Facility for Emerging Markets Hit By Crisiswith John Lipsky, IMF First Deputy Managing Director, and David Hawley, Senior Advisor, External Relations Department
Washington, D.C. October 29, 2008
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MR. HAWLEY: Welcome to this press conference with the Managing Director Dominique Strauss-Kahn, and John Lipsky, the First Deputy Managing Director. Before taking your questions, the Managing Director will make some opening remarks.
MR. STRAUSS-KAHN: Thank you, David. Just a few words. Thank you for being here this afternoon. I asked you to come to give you some information about what the Executive Board of the IMF approved this morning, which is the creation of a Short-Term Liquidity Facility, established to support countries with strong policies that, nevertheless, face temporary liquidity problems in the global capital markets due to the financial turmoil. So it appears to us in the past weeks, much more than weeks, that there were many countries facing these kinds of problems, that there was a gap in the Fund's toolkit of financial support and that we were not really equipped to face this kind of support. Most of the facilities, if not all of the facilities, of the Fund are in fact designed for countries that require both financing and policy adjustment. Of course, they can be used by a country needing only financing and no policy adjustment, but they have been in the past mostly used by a country needing financial adjustment. We didn't have any kind of instrument which could be seen as a Short-Term Liquidity Facility and used by a country having a very strong track record but nevertheless facing pressure on its balance of payments.
So that's the reason why this Short-Term Facility has been established. The key features are the following: I've just told you what's the purpose. The way in which it will operate is up-front quick disbursing, short-term financing using IMF resources. The disbursement of Fund resources can be up to 500 percent of quota with a three-month maturity. What has been decided this morning is that eligible countries are allowed to draw a maximum of three times during a 12-month period, meaning that they can roll over the first three months a second time and a third time, and then during the 12-month period it's over.
Then comes the question of eligibility. As I told you, it's designed for a country with a track record of sound policies, which have been assessed by the IMF through the normal Article IV Consultation process. That's one of the main points of this facility. Given the strong emphasis on past performance, financing is made available to the country without the standard phasing and conditionality of Fund arrangements. So it allows us to move fast. We can talk about pre-conditionality, that's the track record, but not traditional conditionality. The only thing is that borrowers are expected to go on with the strong policies that made them eligible.
Separately, as you may know, we have activated our exceptional response, which means that we can act very quickly. This has been done for Hungary, Ukraine, and Iceland.
With the existing emergency financing mechanism and the new facility that we designed this morning, I think the Fund is ready to make its contribution to the resolution of the financial crisis as far as short-term liquidity questions are concerned.
The last thing I would like to underline is that, as you may know, this is a very new process, but it's a new process that has been designed very rapidly and it shows that the Fund is able to react very quickly and decisively to help its membership. So that's the broad picture of the facility, but both John Lipsky and myself are prepared to answer any of your questions.
QUESTIONER: Three questions and very specific. How many countries have already shown interest in this Short-Term Liquidity Facility? What's the total amount that the IMF expects to be drawn by countries interested in that? And what will be the interest rate that will apply to that facility?
MR. STRAUSS-KAHN: How many countries? Some. Some, even if this facility didn't exist. So to answer your question, we need to wait for at least 24 hours until the facility is known with all the details. It's very difficult for a country to express a strong interest in a financial instrument that is not really designed and without knowing what will be exactly the parameters. But some countries did and I'm expecting that this facility will provide support to the countries which are directly concerned.
The total amount? It depends upon the country. As I said, the maximum amount is 500 percent of quota. Five-hundred percent of quota will represent a large amount for big countries, of course a smaller amount for smaller countries. What has been said in the discussions this morning is that whatever happened, we will review the process of the facility if we reach half of the Fund's available resources, which are SDR 60 billion, that is, around US$100 billion.
On the third question, the interest rate will be the normal charge of the Fund. We use for this facility the normal charge and surcharge scheme that we use for other facilities.
QUESTIONER: I have two questions, if I may, one on this issue of the conditions. In the first place, it says that the conditions will be based only on measures to get past the crisis. I wonder if you could expand. What are those conditions? Then, you said that the country must have had a very positive assessment in the Article IV Consultation discussions and I was thinking of a country like Argentina, which hasn't had an Article IV for more than a year. I wonder if a country like Argentina will not be eligible to a program like this just because of that, for example.
MR. STRAUSS-KAHN: You were talking about the conditionality? Having a very strong track record and strong policy in the past. What means the past? It doesn't go back 20 years ago, but at least I think it's two years and one year is the minimum. It can be two years or three years. So it restricts the number of countries which may be eligible and it's a facility which is defined in a totally new way for the Fund because of this precondition, and no conditionality attached to the facility itself. But of course the counterpart of that is that we cannot expect that there will be 100 countries likely to be eligible. And I'm afraid that the country you've just mentioned, for instance, because for the reason you said will not be eligible for this facility. But every case will be looked at by the staff and if any country is interested, they just have to approach the Fund, on a confidential basis, and we will, also on a confidential basis, see if they may be eligible or not. So there's no great list of eligible countries. Every country is likely to ask the Fund if they are eligible or not.
QUESTIONER: Another question on conditionality. The Fund was criticized a lot after the Asian financial crisis for very strict conditionality at a time of crisis. Is this a sign that the Fund has learned lessons from that and is adopting a very different approach?
MR. STRAUSS-KAHN: The IMF will not be the only institution or the only person in the world not able to draw any kind of lessons from the past. So we certainly look at what happened in Asia. The mission of the Fund in Asia has been fulfilled, which was to contain the risk of financial crises all over the world, but a lot of criticism has been made, as you said. That was 10 years ago, and we're looking at that. I have asked to look at what I call targeted conditionality in any other facility, not only this one. What is targeted conditionality? It means that the conditionality has to be directly linked to the needs of the program for the program to be a success.
There is no way for the Fund to lend money without conditionality. Lending money without good policy is just a waste of money. We need to implement good policy. So for Hungary, Ukraine, the other countries we're talking with, we have conditionality, but the point is that it's targeted conditionality, which may be somewhat different from the past, meaning that it's the conditionality which is needed for the program to be a success and in no way a condition which will be maybe good for the country but far from the needs of the program.
Now, when I'm looking at this facility, it's even more different than targeted conditionality because it's pre-conditionality. There is no conditionality asked when the country, Country A or B, comes to the Fund. And if staff and management consider that this country may be eligible looking at the track record and then go to the Board to ask for approval, then the approval will be given or not looking at this track record. But there's no conditionality attached other than going on with the same policies, of course.
MR. LIPSKY: It's probably worth clarifying that it's not because we don't have faith in the usefulness of conditionality, it in fact reflects the short-term nature of this facility which makes this approach the appropriate one.
QUESTIONER: Managing Director, five times quota is quite a bit with regard to the IMF itself, but with regard to these countries, given the size of global capital markets, it might actually be quite small. In Brazil, for example, five times quota I think is about US$20 to US$25 billion, which is a tenth of its foreign exchange reserves. Is this actually going to be big enough to have any serious effect unless, as you seem to suggest, it's also aimed at getting money in from other bilateral donors on top?
MR. STRAUSS-KAHN: There has always been the catalytic role of the Fund, and in no way the Fund has the potential to solve all problems alone. So using traditional facilities, like you have seen in the press release on Hungary yesterday, it plays a catalytic role, with the European Union and the World Bank coming along with us. So you're right in saying that, even if 500 percent of quota is rather big compared with that quota, it may not be that big compared to the needs. But it's part of the Short-Term Facility that they may need. They can also find some other short-term facilities available and some bilateral facility or bilateral help may also happen. But it was certainly useful for the Fund to give the signal that we are likely to help some of our members in a short-term period without any kind of conditions.
QUESTIONER: Can you give us an update on the timing for Iceland's package?
MR. STRAUSS-KAHN: Prior actions have already been taken; I'm thinking about the increase of the interest rate from 12 to 18 percent, which was done yesterday. Now the package is going on and I think there won't be any kind of problem in the Board. While I cannot say before the Board takes place what's going to happen, I will recommend the Board to accept this package and to go on. The Prime Minister, Mr. Haarde, whom I just talked to on the phone, is very committed to the success of this program. And, as you know, in general, for all kinds of programs, but especially for a situation like the one we face in Iceland, the commitment of all the parties at stake, the government, the central bank, and the IMF, is necessary. I think we won't have problems down the road and we will be able to fix the problems.
QUESTIONER: The IMF has tried something like this once before called the CCL. It had it for 3-1/2 years and the developing countries weren't interested largely because they felt there was a stigma in going to the Fund. I'm sure that this must have played into your thinking with this particular facility. Can you talk about how it's different and why you don't think a stigma will attach?
MR. LIPSKY: The SLF, this facility, is designed to be easy to use, very rapid, and for those countries where use is appropriate, so we can move very quickly. I think the impression, and I can say from the standpoint of someone who was in the financial markets at the time the CCL was adopted, it seemed by comparison cumbersome to use. In fact, there was even initial skepticism that it would be useful. In this case, the instrument seems appropriate to the moment. We won't judge it in the short-term by its use. We would expect that in the current context it will be used. That's why we did it. We will review it over time. We fully expect it to be used but won't necessarily judge the appropriateness of it if it's used immediately or not. It's something that we thought the Fund ought to have.
QUESTIONER: When you're talking about the assessment, it says it will be countries that have been assessed "very positively" by the IMF, which is a very sort of vague standard. I looked at those CCL standards, which were really very detailed. So I take it that's one of the differences essentially.
MR. LIPSKY: Exactly.
QUESTIONER: Gordon Brown has suggested that China and Persian Gulf States pitch in money to the IMF. I wonder if this facility would be open to outside donations like that. And do you think you need it? Do you think you need more money beyond the US$200 to US$250 billion that you have?
MR. STRAUSS-KAHN: Do you know anybody not needing money? What Gordon Brown said is not linked to this facility. This facility has been designed having in mind all our resources as they are today. Now, it's right to say, as Gordon says, that in the crisis we're living in now we probably will need to have more resources. Why? Because the question is not only the balance of payment problems with our traditional tools or short-term liquidity needs that this facility will address. The problem may be a broader one. As you may know, our forecast of growth for 2009 is around 3.0 percent at the global level, which breaks down into zero percent for advanced countries and between 6.0 and 7.0 for emerging countries and low-income countries, but mostly coming from emerging countries. This means that 100 percent of growth is expected to come in 2009 from emerging countries and zero percent from advanced economies. So we need this growth. And it's not obvious, owing to the way the financial turmoil is going, that the commitment that those countries have made, the budget they have, will be able to sustain growth. We very strongly encourage China, for example, to shift from an export-led model to a more domestic-led model, with growth coming from consumption rather than from exports. But it cannot be done easily, and the cost of this can be partly the decrease in the growth rate.
So, what I want to say by all this is that we probably will have a need to support growth in the world and to have some budgetary support to countries having planned possibly a balanced budget and being just unable to go on because of the slowdown in the world economy. In this case, the resources of the Fund may not be enough and I think that's what Gordon Brown has in mind when he says that it could be useful to increase the Fund's resources.
QUESTIONER: Do you think that the strong volatility on exchange rate markets affects your growth forecast for 2009? In your Global Economic Outlook you didn't talk about that topic.
MR. STRAUSS-KAHN: Volatility always makes forecasts more uncertain, and certainly what happens on the markets in general, not only the currency markets, but all the markets, makes our forecast more questionable or less reliable than if we were in a world where everything was strongly established. Nevertheless, I think that the forecast we made and we released the week before the Annual Meetings is still a strong one, the one on which we rely. It's not very optimistic at least. Of course, if there are more problems on the financial side, more repatriation of capital flows, more drying up of capital inflows in emerging countries, then the prospects will be less positive. So there are a lot of downside risks which have not yet materialized, but they may, and so the baseline remains the one we proposed months ago, but it will not be reasonable not to say that there's a lot of risk which may change this forecast in the coming months.
MR. HAWLEY: Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT
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