[stop-imf] Wash Post: IMF, World Bank Short on Global Solutions

[Robert Weissman]

IMF, World Bank Short on Global Solutions
By Paul Blustein
Washington Post Staff Writer
Monday, September 30, 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, however, the top
policymakers who
gathered for the meetings had to grapple with some serious threats menacing
the world economy -- and they offered scant evidence that they are prepared
to dispense with them.

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 rh
etoric 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.




© 2002 The Washington Post Company