Dominique Strauss-Kahn: "I will propose a global regulation strategy to the G20," Interview published in Le Monde

October 30, 2008

Interview published in Le Monde, October 30, 2008

When will the downward spiral of the world's stock markets end?

The extreme volatility of the markets is evidence that the financial crisis is still having an impact. I am fairly confident that this volatility will subside because the American and European plans are sound; they just need a little time for their full impact to be felt. I am more concerned, however, about the slowdown of the global economy and its social repercussions. This is why the IMF cannot merely act as a firefighter, putting out balance of payments fires but must also be a builder helping to rebuild growth. We expect that global growth will be 3 percent in 2009, 0 percent for the advanced economies and 6-7 percent for the emerging countries. Since February, I have advised those countries that were in a position to do so, to anticipate the need for cyclical budgetary support.

You kept silent for a long time. Why were you not the one to prepare the Brown Plan, which has been a model for other bailout plans?

You do not have the whole picture, and that's normal. When a banking crisis erupts in a country, the IMF does not play a direct role but acts as an advisor to the government. Armed with our unique analysis of 122 past crises, we hammered home two recommendations: first, to end the case-by-case approach and develop a comprehensive plan; and then to recapitalize the banks, because an injection of liquidity would not suffice. Up until mid-September, the effectiveness of this plan required discretion. Since then, given that our advice has been heeded, we have been able to speak out publicly.

What do you think of Gordon Brown's proposal to make the IMF a world central bank with increased financial resources?

Gordon Brown is right to want to reform the world's financial architecture. With globalization, when the real estate market collapses in Virginia, Hungary suffers because the decline in the U.S. housing sector causes problems for U.S. banks and then for all banks around the world, because the U.S. banks repatriate their money from these foreign banks and cut credit to countries further afield. The domino effect ensues. The IMF can counteract this. To be able to do so, its needs to have its role as global regulatory coordinator reaffirmed. This is the approach Nicolas Sarkozy has taken. I would therefore propose a new governance plan or "global regulation strategy" to the G20 that would revolve around the following five key ideas:

1. Develop a new loan to relieve the short-term liquidity problems some economies face; we have already defined the features.

2. Increase the IMF's resources, which could prove insufficient in the medium-term in light of the scale of the needs; this is what Gordon Brown has proposed.

3. Draw lessons from the economic policies that have repeatedly caused these "bubbles," which destroy the real economy when they burst; this is the mission we were given a few days ago by the 185 member countries of the Fund.

4. Oversee the implementation of the new financial regulations drafted, in conjunction with the IMF, by the Financial Stability Forum, which brings together mainly the major central banks.

5. Contribute to redesigning a simpler, more effective world system that would be more coherent and better coordinated as a result. In addition to its roles as fireman and builder, the IMF could also play the role of architect for a period of time.

What do you expect from the G20 meeting in Washington, D.C. on November 15?

To grasp the importance of the historic moment we are living through. I therefore expect decisive momentum in dealing with global governance reform, based on the document we will submit to the Group on the lessons of the crisis.

This is an approach that the Americans reportedly do not appreciate ....

This is a time of great change. To varying degrees, all countries-including the United States-recognize that the market only functions if it is organized and that globalization cannot be expected to yield any benefits if its defects are not corrected.

Our meeting on October 11 in Washington was a turning point in this regard: our 185 member countries unanimously agreed to a cooperative system, which paved the way for European unanimity in Paris on October 13. You will recall that only a few days earlier, countries were viewing the situation exclusively through the prism of their national interests....

You will also note that the G20, and not the G8, will be meeting in Washington on November 15 because all the leaders have realized that the global economy no longer comprises the rich countries alone. For my part, I have been constantly drawing attention to the other crisis behind the financial crisis: the one the poor countries face as they are beleaguered by rising commodity and food prices. In the developed countries, the crisis has meant a decline in purchasing power; in the poorer countries, it means the risk of famine for some, malnutrition for many others, and the resulting scars for an entire generation.

The internal investigation requested by your Executive Board into an incident involving your private life has exonerated you from allegations of abuse of power. Has this not affected your credibility and that of the Fund?

The investigation was conducted by an independent agency and the findings are clear and precise. As the IMF's Executive Board has stated, "the matter is closed". For my part, I am actively working on finding solutions to the world's economic and financial problems. In fact, the IMF is already not the same institution it was one year ago when I arrived. It is more representative: the quota reform that had been discussed for years was adopted in the spring and will have considerable effects in the long run. It is more effective: the 500 employees who voluntarily left the Fund have made it possible for us to hire another 100 people to help with our new missions. It is more respected: Asia and Latin America are no longer at odds with the IMF, accusing it of putting out fires at the price of economic and social regression. Finally, it is more pragmatic: just as it would be absurd to lend money to countries without conditions, by the same token, these conditions should not be the result of an ideological stance but aligned to countries' needs. The IMF has learned the lessons from its past mistakes. More than ever now, my ambition is to continue to reform the Fund to enable it to play an innovative role in this new historical context.


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