Buba moralizes

Doug Henwood dhenwood at panix.com
Fri Jul 3 08:06:11 PDT 1998

The German sadomonetarists aren't happy.



FINANCIAL TIMES Munchau, Wolfgang, Bundesbank attacks IMF over Asia., 07-03-1998.


Senior German government and Bundesbank officials yesterday criticised the International Monetary Fund, saying it had contributed to the financial crisis in Asia through generous financial assistance.

Hans Tietmeyer, president of the Bundesbank, and Jurgen Stark, state secretary in the finance ministry, said consecutive IMF bail-outs had lulled investors and lenders into a false sense of security, and had helped spread the crisis throughout the region.

They warned in particular about "moral hazard", as investors get used to being bailed out by IMF support programmes.

The outspoken criticism, at a joint conference organised by the Bundesbank and the IMF, highlights the long-standing gulf between Europe's conservative financial establishment and the IMF.

In a speech to the conference, Mr Tietmeyer said: "The basic problem of any form of interventionist economic policy [is that] the other players come to expect interventions and anticipate subsequent measures. On balance, it has become clear that an interventionist strategy for managing financial crises can easily lead to a dead end."

Michel Camdessus, managing director of the IMF, gave a vigorous defence of the IMF's record: "These [IMF] programmes are hardly bail-outs. Many private investors are taking heavy losses. With stock markets and exchange rates plunging, foreign equity investors have lost nearly three quarters, if not more, of the value of their equity holdings in some markets."

In a thinly disguised counter-offensive he called on Europe to play a bigger role in the IMF than previously. "Europe must have a greater presence and must take on more responsibility as the biggest shareholder of the IMF," he said.

European countries are the largest shareholders in the IMF, even though the US carries the strongest influence. European monetary officials have signalled that they intend to play up to their joint strength after the start of economic and monetary union among 11 European countries next year.

In a separate session, Michael Mussa, the IMF's economic director, acknowledged the problem of moral hazard, especially in bailouts of large countries, such as Russia.

But he said moral hazard was mostly created by domestic policies in the affected country rather than by IMF programmes.

He said the large capital flows into Mexico and Asia had not been made by investors who expected IMF bail-outs

Mr Stark, who is about to move from the finance ministry to become deputy president of the Bundesbank, countered that financial assistance to Mexico four years ago had triggered a fall in emerging markets bond spreads, caused in part by financial markets discounting future IMF intervention.

Both sides agreed, however, that crisis prevention and management required better statistical information about capital flows, especially about loans with a short maturity, which played an important part in the Asian crisis.

There was also broad agreement to engage private sector bankers dir- ectly in the crisis management. .

Copyright Financial Times 1998. All Rights Reserved

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