UPDATE: IMF Strauss-Kahn: G20 Gave IMF A "New Mandate"

By Christopher Emsden and Gabriele Parussini

Of DOW JONES NEWSWIRES

ISTANBUL (Dow Jones)--The International Monetary Fund has been given a "new mandate" to serve as a global lender of last resort but global economic authorities can do even more to drive sustainable growth by bolstering cooperation, IMF Managing-Director Dominique Strauss-Kahn said Friday.

"I believe we can achieve even more," Strauss-Kahn said at a speech on the sidelines of the IMF's annual meeting in Istanbul.

Decisions taken at last month's Group of Twenty summit gave the IMF its new mandate and also bolstered its legitimacy and effectiveness by committing to granting emerging economies a greater quota of the Fund's governance, Strauss-Kahn said.

Evoking the foundation of the IMF and other multilateral organizations at the Bretton Woods conference 60 years ago, Strauss-Kahn said the world needs another burst of global cooperation.

For that, three principles are essential, he added.

"First, international policy collaboration is essential. Second, financial stability demands better regulation and supervision. And third, the international monetary system must be more stable, and anchored by a global lender of last resort," he said.

Although policy makers once referred to the past two decades as ones of "great moderation," and some advanced economies such as the U.K. posted record expansions, Strauss-Kahn noted that recent decades had been marked by "boom and bust" cycles that had to be avoided in the future.

The credit boom that recently ended has led to the biggest recession in decades for most economies. And while there are signs of recovery now, unemployment is "certain to get worse," Strauss-Kahn said.

He urged that governments keep macroeconomic and financial support measures in place "until a sustainable recovery is underway, that can deliver a lasting decline in unemployment."

The greatest near-term risk is that the recovery - so far driven by fiscal and monetary stimulus and inventory restocking - stalls, Strauss-Kahn said.

Another seizure in the financial system is also possible, he added, citing in particular the risk that a larger-than-expected spike in non-performing loans could trigger a reversal in financial markets.

While insisting that there should be global coordination, he acknowledged that exit policies from financial and monetary stimulus will vary by "timing and sequencing," across countries, depending on their pace of economic recovery and financial-sector repair.

But it is "important for countries to adopt common principles for the unwinding of crisis-support measures," Strauss-Kahn said.

Achieving sustainable economic growth will also mean that "each country will need to do its part," meaning that some countries need to save more and others need to boost domestic demand, using structural reforms to do so if necessary, he said.

He also warned that asset bubbles could form on the back of the abundant liquidity that has been pumped into the global monetary system in response to the crisis. That liquidity may be used by investors to search for higher returns in emerging markets, he noted.

Such flows "are not harmful per se (but) they do raise risks of a sudden reversal of capital when advanced economies embark on monetary tightening," Strauss-Kahn said.

"The IMF is not the global financial regulator," Strauss-Kahn said. But improved surveillance of the financial sector could help mitigate risks of rapid market reversals as well as risks linked to the fact that many banks have become "even larger as a result of the consolidation that occurred during the crisis," he said.

Regarding the IMF's future role, he said that its traditional role of providing surveillance - a role many critics say the IMF could never properly carry out on its largest shareholder, the U.S. - would be helped by the G20 proposal of conducting peer reviews.

And an anchoring role as a global lender of last resort could help counter dysfunctional trends, such as the fourfold rise in foreign-reserve holdings since the late 1990s, he said.

The cause of that was "the absence of adequate insurance to guard against sudden stops in private capital flows," Strauss-Kahn said.

The IMF should in theory have been able to provide such financial insurance, but countries amassing the reserves had concerns about the amount of financing available from the IMF as well as the conditions to be attached to such funding and chose to "self-insure" instead, he added.

That is a costly and inefficient approach, channeling funds away from needed investments in education or infrastructure. Such an approach also "complicates" monetary and exchange-rate policy as well as contributes to widening global imbalances, he said.

Such costs show "there is clearly a need for reliable emergency financing - and hence for a global lender of last resort," Strauss-Kahn said.

To credibly play the role of such an insurer, the IMF should be granted a larger resource base, he added.

-By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-05; chris.emsden@dowjones.com

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October 02, 2009 08:23 ET (12:23 GMT)


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