[NYTr] Is IMF starting to fall apart?

[All the News That Doesn't Fit]

Financial Times -  Oct 21, 2007
http://www.ft.com/cms/s/0/e2d8b350-7f8d-11dc-acce-0000779fd2ac.html

IMF may be starting to fall apart

IMF Fails to Make Progress on Reforms

By Chris Giles and Eoin Callan

WASHINGTON -- Rodrigo Rato bowed out as managing director of the
International Monetary Fund at the weekend with effusive plaudits
from world financial leaders in public but sharp criticism of his
role and the Fund's relevance from the same people when talking
outside official news conferences.

The emerging consensus among rich and poor countries alike was that
the reform process of the IMF had moved backward. Worse, they added
that acrimony over the Fund's role in assessing the economic policies
of its members, their effects on other countries threatened to
create just the disorder in the global economy it is intended to
prevent.

"We didn't make any progress this weekend," said an irritated David
Dodge, the Canadian central bank governor, adding that it was a
"pretty big disappointment" and that IMF stakeholders had not
"settled even the principles let alone the details" of institutional
reform.

The communique from the International Monetary and Financial
Committee, the IMF's governing body, put a brave face on the lack
of progress in making the Fund more legitimate around the world by
increasing the voice given to emerging and developing countries.
It said that the new formula for voting shares at the IMF would be
most strongly linked to a country's economic weight in the world,
but it would also reflect the living standards in different countries
and the minimum number of votes given to every IMF member would at
least double.

Mr Rato presented this as an achievement, but many other delegations
privately agreed with Mr Dodge. Emerging economies are aggrieved
that one of the aims of the Fund's medium-term strategy was to
increase the legitimacy of the organisation, but the two big decisions
of recent months -- who would be the new managing director and who
would chair the IMFC -- were stitched up by European countries
behind closed doors.

Senior officials in group of seven countries told the Financial
Times that the reform process would have to start again under
Dominique Strauss-Kahn, the new IMF managing director who takes
office at the start of November.

The IMFC announced it welcomed progress in strengthening surveillance
of countries' economic policies and spillovers from one country to
another. "The committee looks forward to review the progress and
experiences in these areas," the communique stated. But the IMF's
new surveillance policies -- in particular trying to be an umpire
in determining when one country's exchange rate regime is having a
detrimental effect on other economies -- are also causing acrimony.

China, the country most likely to fall foul of the new procedures,
voted against the new surveillance rules and since the rest of the
global community, through the IMF, cannot force a country such as
China to change its policy, the new rules have only served to
heighten tensions.

Morris Goldstein of the Peterson Institute for International
Economics, said that there was a serious risk of widespread conflict
between emerging and advanced economies in the years to come. "What
you are seeing with China and the US is just the tip of the iceberg,"
he said.

Mr Dodge said: "This is precisely the time we need the fund's ability
and skills to deal with global imbalances," adding that the breakdown
in reform efforts had decreased the "chance of coming to a common
view across the fund's membership" on currency policy.

"The longer the imbalances go on, the greater risk that we will end
with a rather messy dC)nouement," he said.

The IMFC put a brave face on the dissent that was within its ranks.
Rather than concede that problems exist, it repeated the message
from Fund officials over the past week that the global economy was
still growing strongly, although it will be slowed by the credit
squeeze.

The finance ministers and central bank governors who sit on the
IMFC agreed that all relevant national and international bodies
should study possible improvements for risk management in complex
financial products, the accounting of off-balance sheet vehicles
in banks, the work of credit ratings agencies, and the regulation
of liquidity in financial entities.

Jean Claude Trichet, the head of the European Central Bank, said:
"Certain areas of the regulatory framework may need to be reviewed,
such as the treatment of liquidity risk and securitisation framework,
in particular the treatment of liquidity exposures to special purpose
vehicles and the assessment of risk transfer, given their significance
in the recent financial turbulence."

Unlike the G7 rich countries, they did not quite call for China to
let its currency appreciate, although the IMFC repeated its call
for "greater exchange rate flexibility in a number of surplus
countries."