Fixing the financial sector is top priority

By Suzia van Swol-University of New Mexico, Talk Radio News Service
During a news conference discussing prospects for the upcoming G-20 summit meetings and the role of the International Monetary Fund (IMF). Managing Director Domique Strauss-Kahn said among the topics that he would like to see developed and explained during the G20 meeting next week are the financial sector, sustainability of fiscal efforts, needs of the emerging countries, and special needs of the low income countries, and he named fixing the financial sector as the most important of these five goals. Cleaning the balance sheet of the financial sector, and especially of the banks, is “the right thing to do now,” said Strauss-Kant.

Strauss-Kant said that you can put as much money as you want in financial, fiscal, stimulus but if at the same time you don’t clean up the balance sheets at the bank, and you don’t make the financial sector working again, then it will just melt.

Strauss-Kant stated that different countries can use different techniques depending on their history, political constraint, but they have to do it and they have to do it now.
He went on to say that the capital influences that the emerging countries relied on are now dried up, which is why we need to have resources for the IMF and we need to improve our facility to help those countries. “The problem of emerging countries is now becoming one of the biggest problems of the crisis,” said Strauss-Kahn.

Regarding low-income countries, Strauss-Kahn said that, “even if the figures, the needs, are not as big as the needs for emerging countries, the needs are significant and I want to make it possible to double the concessional loan that the IMF is lending to those countries.” He said that he hopes the change in facility that was introduced a few days ago will be helpful and stated that “I would like to see the G20 approving this.”

We are still in a situation where most of the markets are frozen, said Strauss-Kahn, and “everything which can be done by the central banks to try to de-freeze this system is welcome in my view.”

Strauss-Kahn said that it is understandable for China to raise questions about a global reserve currency and stated that, “I don’t see that the role of the dollar is at threat today.”

In response to questions about the Chinese artificially keeping their currency low in order to stimulate their exports, Strauss-Kahn said that the big changes which will take place because of the crisis include the kind of changes which will force countries like China to take more into account domestic demand and as a result to have a re-evaluation of their currency.

Strauss-Kahn said he thinks that what has been announced by Secretary of the Treasury Timothy Geinthner goes in the right direction. He stated that, “fiscal stimulus itself will only be affective if the financial sector is healthy again.”

Strauss-Kahn addressed that the debate about the IMF being more on one side than another is “totally wrong.” He said that there is no domestic solution to what may be the first real global crisis. He stated that we all have in mind examples of countries where the temptation is to keep at home the money which is used to try to boost the economy and it is very difficult to explain that what we are doing has to be done even if it’s for other countries because we will then in return benefit from what they do. “The attempt to say we’re going sort our own problem alone is something which happens everywhere.”

"No country is immune"

In anticipation of the 2008 Annual Boards of Governors Meetings, popularly known as the ‘G-7’, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn said “the economic crisis we’re in is very serious, but we can solve our problems if we act swiftly and coordinately.” Both the IMF director and World Bank President Robert Zoellick agree that this is a global crisis, and ‘no country is immune’. The leaders claim confidence and cuts in interest rates are the swiftest solutions to the crisis. Confidence is the first tool to be used in response to the economy, and Strauss-Kahn said “if you have the scope for fiscal stimulus, use it.”

The IMF predicts the global economy will have a slow recovery, but will come back starting in the second half of 2009. In order to initiate this growth, the IMF advises action to rejuvenate economic growth. This is why the IMF activated a ‘high access financial program’ yesterday, which will allow the management board to give fast and easily accessible up front payments, while also defining a long-term macroeconomic plan.

The IMF forecasts that the growth rate of developing countries will decline from 6.6% next year to around 4%. They say this is still an acceptable rate of growth, but the deceleration would be so sharp as to feel like a recession. Zoellick said “with the rising economic powers, the G7 countries can work through this crisis by dealing with bad assets, recapitalizing banks, and providing much needed liquidity.” Strauss-Kahn said that, “you can’t say a crisis affects all parts of the world and then develop economic policies that don’t consider the global economy”.