Outgoing IMF managing director Rodrigo de Rato has defended the Fund against charges by one of his predecessors, Michel Camdessus, that this years financial crisis need not have happened, if Fund members had implemented reforms agreed in the late 1990s. In an interview with Emerging Markets, de Rato argued that new lessons have to be learned from the present crisis.
Michel Camdessus, who headed the IMF from 1987 to 2000, told Emerging Markets that he was angry that the crisis that began in the sub prime mortgage market is exactly a crisis that should not have occurred, if the IMF membership had implemented what we agreed at the end of the 1990s concerning the golden rule of transparency.
Then, there was agreement in the IMF on the need for enhanced surveillance, about the instruments of the market and about the transmission mechanisms between national and international phenomena, said Camdessus. If we had paid closer attention to the social risks entailed by financial sophistication and more, then this crisis wouldnt have occurred.
De Rato acknowledged that the current crisis is based on past elements of lack of transparency, lack of understanding and lack of sufficient market discipline. But he argued that crises are not going to disappear from the face of the earth and crises are usually unexpected.
The IMF and the G8 had issued clear warnings that investors should avoid complacency, that due diligence was needed and that risk pricing was too low, he noted.
Problems are not answered by over-regulating, and trying to regulate crises out of existence is probably useless, de Rato argued. Globalisation and financial sophistication are at the centre of the dynamism we have seen in the world economy recently. That was not to say lessons could not be learned, he added.
We have to learn lessons in transparency that is key. We have to learn lessons in discipline, the role of ratings, the difference of ratings between different types of financial products, and the need for due diligence. We have to learn lessons in terms of the structure of regulation and on whether off-balance-sheet obligations of banks should be taken into account in future liquidity problems.
De Rato said that seminars would be held this week in Washington with the Bank for International Settlements and the Financial Stability Forum. We are already working on these issues with many countries through our Article 4 Consultations.
He expressed hope that fall out from financial market turmoil can be contained. The credit crisis in the US and Europe and other industrial countries has had a limited impact up to now on these economies. In many cases spreads and equity markets have come back and are even higher in some cases. This tells us that emerging economies are in a much more resilient situation than they were a few years ago.
But, I think it would be very unwise to believe that what we have seen in the US and in the EU markets will never happen elsewhere, said de Rato.