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IMF, World Bank Short on Global Solutions

By Paul Blustein, Washington Post, Monday 30 September 2002; Page A16

Barely mussed or fussed, the high command of the global economy glided with ease through the weekend’s meetings of the International Monetary Fund and World Bank, as antiglobalization demonstrations proved unexpectedly punchless.

While they may have trumped the protesters,

In addition to well-publicized woes like plummeting stock prices worldwide, anemic growth in Europe, Japan’s banking mess and the danger of a spike in oil prices induced by a war with Iraq, the prospect of a full-blown economic crisis in Latin America loomed large at the meetings after last week’s meltdown in Brazil’s financial markets. The Brazilian currency, the real, hit record lows day after day, and by Friday the government’s bonds were trading at about 48 percent of face value, heightening fears that the region’s largest country will follow neighboring Argentina into default on its debts.

Soothing rhetoric came from the finance ministers and central bankers of the Group of Seven major industrial countries, who issued a one-page communique Friday night stating that while risks remain, they were confident that policies they have adopted will strengthen growth in coming months. Brazil got a half-sentence patting it on the back for its sound policies.

But far darker assessments were prevalent among international bankers, investment executives and other financial specialists attending a gathering a few blocks away from the official meetings. The group hosting that meeting, the Institute of International Finance, recently projected that private flows of funds to the world’s emerging markets would fall this year to the lowest level in a decade because of a growing aversion to risk among lenders and investors.

It’s terrible—we are teetering at the edge of recession, said Klaus Friedrich, an adviser to Allianz-Gruppe/Dresdner Bank of Germany. What you are seeing here, he added, gesturing at a roomful of executives, is a lot of bankers with problems in their briefcases.

An official of a major U.S. mutual fund, who requested anonymity, agreed. Look at the U.S., Euroland, Japan, Latin America—it’s hard to find anything to be particularly cheerful about, the official said, adding that the general mood reminded him a bit of the 1998 IMF-World Bank annual meetings, an extraordinarily gloomy session which came amid a panic in global markets following a debt default by Russia.

I understand that it’s the role of the G-7 to say things are okay, the official said. But my reaction is, they’re asleep at the switch.

Treasury Secretary Paul H. O’Neill dismissed such downbeat talk as overblown when asked at a news conference about the worries besetting markets. Asserting that it was important to bring some sense of balance to where we are, he recited a litany of favorable data on the U.S. economy—inflation at minimal levels, interest rates at 40-year lows, housing and auto sales booming. I don’t find the world to be a place where hand-wringing should prevail, but a place where leaders should get on with it, he said.

But O’Neill did not attempt to dispel the impression that Japan’s leaders are floundering even more than usual in their decade-long efforts to lift the world’s second-largest economy out of the doldrums. The recent fall in the Nikkei stock index to 19-year lows has aroused fresh anxiety about the danger of a crisis in Japan’s giant banks because of the losses suffered on the vast portfolios of shares.

In the days leading up to the IMF and World Bank meetings, confusion reigned about Tokyo’s plans for tackling its economic and banking problems as government officials issued contradictory statements and criticized the Bank of Japan for its announcement that it would buy stocks from the banks. Dismay deepened over the weekend from a bizarre series of flip-flops by Finance Minister Masajuro Shiokawa and his top aides over what had been discussed in a meeting with O’Neill.

O’Neill acknowledged that the meeting had failed to provide him with an understanding of how Japan’s policy moves would help, and he heaped scorn on the Bank of Japan’s share-buying initiative. If shares in a company are held by your neighbor instead of by you, what’s the net economic effect? he demanded.

As for Brazil, IMF Managing Director Horst Koehler sought to dampen concern that the country was hurtling toward default, but his reasoning added little to what other top policymakers have said in recent days as Brazilian markets kept falling.

The IMF already has pledged to lend Brazil up to $30 billion, its biggest rescue package in history. The move, however, has failed to reverse a steady outflow of capital from the country, which has accelerated as a left-wing candidate, Luiz Inacio Lula da Silva, has gained a commanding lead in polls for next month’s presidential election. A common belief among investors is that Lula, as he is known, plans to abandon the current government’s free-market, anti-inflation policies.

As a result, many experts fear that the markets are creating a self-fulfilling prophecy of default by pushing to impossibly high levels the government’s costs of borrowing and servicing its debt of more than $300 billion. The steep decline in bonds means investors are demanding yields of more than 20 percent. The decline in value of the real also hurts because much of Brazil’s debt payments automatically rise when the exchange rate falls.

At a news conference Saturday, Koehler said that he nonetheless expects markets to settle down after the election and give the new government some breathing space.

The facts are, first, that this country has a huge potential for growth, he said. We have heard from the major candidates that they endorse the crucial elements of the IMF work program, which includes strict targets to keep the government from overspending.

Some bankers said this weekend that the strategy stands some chance of working even if Lula wins, provided he starts off by employing moderate rhetoric and chooses an economic team that inspires market confidence about his intention to follow IMF-backed policies. But others were skeptical. In the short term, Lula will say, ’I’ll do what I promised the IMF,’ but what we’re worried about is the medium term, an official at a U.S. bank said.

Although the meetings may have done little to calm market jitters about immediate problems, the policymakers did make progress in advancing ideas aimed at avoiding future crises.

But even on that score, the results were limited. After the U.S. Treasury claimed Friday that emerging-market countries were moving toward issuing bonds with special crisis-resolution clauses, Mexican Finance Minister Francisco Gil Diaz undercut that claim by declaring Saturday that his government has no intention of doing so.