The rich countries of the G7 bear a great responsibility to the rest of the world to restore the financial system to health, Latin American politicians and financiers argued in Washington at the weekend.
“We are in the hands of the most advanced countries”, said the Colombian finance minister Oscar Zuluaga in an interview with Emerging Markets. “We are expecting a clear message and a strong position to restore confidence. We desperately need that”, he said.
Ernesto Talvi, executive Director of the Montevideo-based Centre for the Study of Economic and Social affairs, said: “The Fund does have the resources to make a difference in many emerging market countries.
“These should be protected by international organizations, just like central banks and the treasuries are acting to protect their own systems.
“[IMF managing director Dominique] Strauss-Kahn’s initiative is totally appropriate. It is exactly what the IMF has to be doing, as a supplier of international liquidity when the markets turn to be dysfunctional.
“The Fund has a key role to play in this crisis, to avoid it reaching emerging markets and further contagion.”
Talvi was last March co-author of a report, All That Glitters May Not Be Gold, which warned of the risks of a downturn after years of abundance.
Previous policy changes at the IMF have proved counter productive, Talvi said. “It was a mistake to trim down the fire force just because there was no fire. We have to be careful not to get rid of an institution that could be a lot of help.”
Talvi echoes concerns recently expressed by some of the Fund’s executive directors, including Hector Torres of Argentina, who recently compared the IMF’s stance as one of “an idle fireman”.
Torres also recommended abandoning the traditional system of conditionality before the Fund releases loans in an article published by the Project Syndicate. Strauss-Kahn hinted at “streamlined conditionality” last week.
Meanwhile, Talvi did not rule out any “credit event”, as the markets mood turn increasingly sour. “If the current scenario continues to deteriorate, we are going to see some financial distress in countries that are very highly dependent on commodity prices.” The international community could mobilize resources to deal with such situations.
The IMF’s intervention in favour of emerging markets is crucial, as the Fund expects them to account for “100% of growth” next year. “The Fund must be ready to deploy all resources to prevent a crisis that would derail emerging markets. It should act with the same decisiveness as central banks and treasuries in developed economies did in their own system”, Talvi said.
The G20 group, which comprises the G7 leading economies and key emerging markets, underlined the need for international cooperation after their meeting on Saturday with US president George Bush. A communique said that the group would ensure that “the action of one country does not come at the expense of others or the stability of the system as a whole”.