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Even IMF Is Facing a Credibility Crisis (fwd)
Weakened Leaders Add to Global Jitters
Even IMF Is Facing a Credibility Crisis
By Paul Blustein
Washington Post Staff Writer
Wednesday, September 2, 1998; Page A30
Think of a tightrope walker who has just realized that
the net below is full
of holes. Now you are grasping one of the key factors
behind the recent
turmoil afflicting global financial markets.
Almost everywhere they look, people who invest large
sums of money
see not only countries in distress but also a
disturbing weakness in
big-power leadership and global institutions. In
short, they're afraid there
will be no one to bail them out when their investments
in dicey
economies go sour.
The most important leaders of the Group of Seven
industrial countries --
the club that traditionally joins forces to try to
manage global economic
trouble -- look more hobbled than they have in years.
President Clinton
is fending off calls for his resignation over the
Monica Lewinsky scandal,
and he has been unable to persuade Congress to help
replenish the
dwindling cash reserves of the International Monetary
Fund despite the
pleas of Treasury Secretary Robert E. Rubin.
Japanese Prime Minister Keizo Obuchi is suffering from
fierce criticism
over his cautious approach to the nation's banking
crisis; German
Chancellor Helmut Kohl is fighting for his political
survival in an upcoming
election. And of course, Russian President Boris
Yeltsin, who was invited
just last year to join the G-7 at a "Summit of the
Eight" when he enjoyed
a relatively firm grip over his government, has been
marginalized amid
the collapse of the Russian economy.
"The global financial shocks are occurring during a
period of leadership
crisis and transition in many countries which is
inhibiting their ability to
respond effectively," David Hale, chief economist at
Zurich Insurance
Group, wrote in a memo to clients this week. He cited
this example:
"Chancellor Kohl is facing such a difficult reelection
campaign that he was
opposed to Germany providing new financial assistance
to Russia during
the August crisis which culminated in devaluation.
Until recently, by
contrast, Chancellor Kohl supported very generous aid
policies for Russia
and other former communist countries in eastern
Europe."
Most alarming of all, perhaps, the IMF's credibility
as the world's
economic fireman is under unprecedented strain,
because of both its
cash shortage and the failure of its $22 billion
rescue of Russia. Because
of the thousands of nuclear weapons Russia holds,
global investors
widely assumed that the IMF and its G-7 backers could
never allow
Moscow to go under -- an assumption that was rudely
disproved on Aug.
17, when the Russian authorities devalued the ruble
and effectively
defaulted on the country's debts.
"The concern in the markets is -- it's like there's no
IMF backing up these
countries, and if things get really bad, who's going
to do something?" said
David Tepper, who heads Appaloosa Management, a New
York
money-management firm. "There was this 'too big to
fail' doctrine that
some people thought would hold for these countries,
and now,
obviously, it doesn't hold. And there's nobody to fill
the breach --
whether it's Clinton, or the Republicans, or the
Democrats -- nobody
you can count on not to play politics."
The crisis, to be sure, has its origins not in
political weakness but in
fundamental economic problems: crony capitalism in
Asia, the embedded
inefficiencies of Soviet communism and rampant
speculation by Western
investors in emerging markets.
And arguably, there is little the IMF or G-7 can do in
a situation such as
Russia's, where the government proved politically
unable to put the
country's economic house in order.
But now, according to market players, the turbulence
is being fueled by
worries that the leadership vacuum in wealthy
countries could
undermine prospects for a well-coordinated
international response.
"It seems like everywhere you turn, you've got leaders
that are
embattled politically, and yet what this situation
requires is a coordinated
international effort," fretted a New York fund manager
who asked to
remain anonymous.
Some see a bright side to the new sobriety in the
markets. The ready
availability of IMF bailouts in the past raised the
problem of "moral
hazard," because many investors believed they would be
rescued from
imprudent decisions at taxpayer expense.
"Now, there's a buyer-beware world, and that's good in
the sense that
investors have to be on their toes and thinking
critically," said Mark
Siegel, managing director for emerging markets at
MassMutual, the
insurance giant. But the downside, he noted, "is that
volatility will go up,
because the IMF is no longer automatically perceived
as being able to
dampen volatility in times of financial stress in poor
countries."
It is not that the G-7 has run out of options -- or
figures who command
respect. The Federal Reserve Board, under Chairman
Alan Greenspan,
could cut interest rates, possibly together with
central banks in other
countries, if the crisis appears to be getting out of
hand. Indeed,
according to a wire service report from Tokyo
yesterday, Japanese
Finance Minister Kiichi Miyazawa will present a
proposal for a
coordinated rate cut to Rubin when they meet later
this week in San
Francisco.
But the Clinton administration has shown reluctance to
take such steps
until the Japanese authorities start tackling their
economic woes in
earnest. And frustration is mounting in Washington
over Obuchi's
unwillingness to close insolvent banks.
"They are just dilly-dallying," fumed Daniel Tarullo,
who until earlier this
year was Clinton's chief international economic
adviser. "There is now a
real risk that the 20th-century Japanese economy will
be remembered
not for its fabulous achievement in modernizing that
country, but for
having pulled the entire world into an economic
maelstrom."
Still, while many analysts agree that timidity among
Japan's leadership
poses perhaps the biggest threat to global financial
stability, Clinton's
troubles could also deepen to a dangerous level.
In his letter to clients, Hale observed: "Congress
could become more
supportive of impeachment if it perceives that falling
equity prices and a
deteriorating economy are undermining support for the
president
himself. In such a scenario, a situation could develop
in which American
political paralysis and economic uncertainty become
self-reinforcing
negative factors in the equity market."
For now, the Clinton administration is seeking to use
the market turmoil
to prod Congress into passing the long-stalled IMF
legislation.
"Events over the last eight months -- not to mention
the last few days
and weeks -- underscore the impact on the U.S. economy
of
developments abroad, including in Asia and Russia,"
Rubin wrote in a
letter yesterday to House Speaker Newt Gingrich
(R-Ga.). "We simply
cannot afford any further delay in providing the IMF
with the resources it
requires to help contain the threat of further
financial and political
instability around the world."
Hobbling Along
Not only has the global economic situation become
compromised, so
also have many of the world's major leaders. Here is a
snapshot of the
situation at the International Monetary Fund and in
the United States,
Japan, Germany and Russia.
Michel Camdessus
IMF's credibility has been battered by its inability
to stem the economic
turmoil in Russia or Asia, and future action is
hampered by dwindling
resources.
President Clinton
Buffeted by talk of impeachment and calls for his
resignation over the
Monica Lewinsky scandal.
United States
Gross domestic product* 3.6%
Unemployment rate: 4.5%
Change in markets, year to date -1.02% (Dow)
Change in currency value, year to date** --
Keizo Obuchi
Suffering from fierce global criticism over his
cautious approach to the
nation's financial crisis.
China
Gross domestic product* -3.7%
Unemployment rate: 4.1%
Change in markets, year to date -10.11% (Nikkei 225)
Change in currency value, year to date** -4.4%
Helmut Kohl
Fighting for his political survival in an upcoming
election.
Germany
Gross domestic product* 1.0%
Unemployment rate: 10.7%
Change in markets, year to date 18.04% (DAX-Xetra)
Change in currency value, year to date** 3.0%
Boris Yeltsin
Fending off demands for his resignation amid the
collapse of the Russian
economy.
Russia
Gross domestic product* -4.7%
Unemployment rate: 8.3%
Change in markets, year to date -83.45% (RTS index)
Change in currency value, year to date** -47.4%
**Relative to the dollar; *Percent change from a year
ago for most recent
quarter
SOURCES: Bloomberg News, Stone & McCarthy Research
? Copyright 1998 The Washington Post Company
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