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Eurodad staff list

IMF back in business as Bretton Woods II conference announced

23 October 2008

The International Monetary Fund (IMF) has started lending again. Its clients so far include three European countries – Iceland, Ukraine and Belarus – and also Pakistan. The policy conditions on recipients appear to be lighter than the Fund’s normal practice. At the same time world leaders have agreed to hold an early summit meeting to reform the financial architecture, although this will only involve 20 governments. Other governments, and civil society organisations, are concerned that this is far too limited a format to agree reforms with broad buy-in.

After several years of being marginalised as governments did not need its finance, the IMF’s regional teams are now scrambling to provide bailout loans to member governments. Iceland is set to obtain a bailout package of around $6 billion. The Fund is likely to lend $1 billion with central banks from other Nordic countries and Japan providing the balance. The Financial Times that "the IMF is not attaching punitive conditions" on the loan. One condition that the IMF might have imposed could have been the privatisation of Iceland’s huge Housing Financing Fund, a state-backed mortgage lender. But suggesting that might have been too embarrassing given that the United States government just nationalised its equivalent institutions Fannie Mae and Freddie Mac. It seems that the IMF will just ask Iceland to produce a credible fiscal tightening plan. The conditions on the larger loan likely to be destined for Pakistan are as yet unclear. A recent Eurodad report - Critical conditions: The IMF maintains its grip on low-income governments shows that the IMF currently imposes 13 conditions per loan to low-income countries, a quarter of them including privatisation or liberalisation reforms.

Meanwhile French president Nicolas Sarkozy has persuaded US president Bush to endorse the proposal for a new Bretton Woods conference. This meeting, to examine and reform the international financial institutions, will take place on 15 November in Washington DC. Civil society organisations who are circulating a joint statement for sign-ons, welcome the high-level attention to the issue of reforming the World Bank and IMF. But they are concerned that this rapidly organised G-20 format meeting will exclude the vast majority of the world’s governments, and give the illusion that political leaders are taking action while little is in fact achieved. It now looks worryingly likely to distract attention from the important UN Financing for Development summit from 29 November to 2 December.

UN Secretary General Ban Ki-Moon has offered to host the finance summit in the UN headquarters in New York in early December. He said ''I strongly believe that holding the summit at the United Nations, the symbol of multilateralism, will lend universal legitimacy to this endeavour and demonstrate a collective will to face this serious global challenge". He continued: “we must act together to ensure, above all, that the negative impact of the financial crisis on the world's economies not undermine the major UN efforts to achieve the Millennium Development Goals, fight against the effects of climate change and address the food crisis.''

The President of the UN General Assembly has also announced a high-level task force to review the global financial system, including the World Bank and the IMF. Economics Nobel Laureate and Professor Joseph Stiglitz will chair the panel which aims to suggest steps “to secure a more stable global economic order”. More details on the composition, timetable and terms of reference of the task force will be announced soon after the Assembly’s special meeting on global financial crisis, scheduled for 30 October in New York.

Several meetings that Eurodad staff have had in recent days reveal that senior European policy makers have few precise reform proposals for this summit meeting and have not started negotiating a common EU position. Indeed smaller European countries are unhappy that they will be excluded from the 15 November meeting. The summit – with its extravagant “Bretton Woods II” billing - may reveal a very dangerous gap between expectations and delivery, even if it only launches a process rather than makes decisions there and then.

Among the issues that the Europeans need to bite on is the question of their overrepresentation in the IMF and World Bank boards. Sebastian Mallaby, author of a major book on the World Bank, commented acidly in the Washington Post “serious IMF reform needs to begin with the modernization of its board. Rising powers such as China and India deserve more say. Declining powers need to give up some influence -- and that includes France and Britain”. Eurodad has called for years for a consolidation of European votes and representatives in the IMF and World Bank, including in our study A Question of Harmony, European Governance of the World Bank and IMF.

Among the proposals currently in circulation are that the IMF create an early-warning system for crises, with the argument that the Fund would do a better job than the private sector analysts and forecasters (including ratings agencies) which have severe conflicts of interest. Various discussions on standards for cross-border capital flows are also likely. Less likely, but vitally important, will be discussions of a fair and transparent debt workout mechanism, measures to tame the shadow banking system based on complex derivatives (see new Eurodad 2 pager), and other measures to prevent wild swings in commodity prices, exchange rates and other important economic variables.

A well-placed source in a major European government told Eurodad that the focus and outcomes of any November conference will depend greatly on the extent on that week’s economic news. If it is bad leaders will just be in fire fighting and grandstanding mode. If not, there may be time to advance the reconstruction of the global economic institutional framework. Either way, the official said, now is the time for civil society groups and other independent actors to come forward with reform ideas and help push to get a substantive outcome.