Chief of I.M.F. Urges Continued Stimulus Efforts

Chief of I.M.F. Urges Continued Stimulus Efforts

By MATTHEW SALTMARSH
Published: November 24, 2009

PARIS — The chief of the International Monetary Fund urged the world’s major economies on Tuesday to retain their economic stimulus programs until there were durable signs of a recovery, including an end to rising unemployment.

Dominique Strauss-Kahn, head of the International Monetary Fund, on Monday. He urged the world’s advanced nations to continue with their stimulus programs until they return to a solid economic footing.

“A premature exit is the main danger,” Dominique Strauss-Kahn, managing director of the I.M.F, said during an interview at the fund’s office here. “We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon.”

Mr. Strauss-Kahn, who was visiting Europe this week, added that “the bigger risk is of growth not coming back, a jobless recovery and to believe that we are out of the woods.”

The comments place the I.M.F. firmly on the side of the major Western governments, the primary backers of the fund, in calling for retention of state support like aid for banks and automakers and tax breaks for consumers.

The I.M.F.’s position contrasts starkly with the prescription it gave to Asian countries grappling with a different economic crisis a decade ago.

Then, the fund, which is based in Washington, lent money to countries including South Korea, Indonesia and Thailand. But it linked its support to harsh financial medicine like high interest rates and a restrictive fiscal policy aimed at balancing budgets. The conditions were blamed for prolonging the downturn in the region.

The I.M.F. has “learned a lot from the Asian crisis — that one-size-fits-all doesn’t work and that you have to adapt to the constraints of the country,” Mr. Strauss-Kahn said.

In the current context, continuing the stimulus entails risks, according to some economists and politicians, like impoverishing future taxpayers, creating excessive reliance on foreign creditors, keeping unproductive banks afloat and even stoking inflation.

Some economists are worried that the splurge in government spending could push the public finances of some countries close to the brink. Rising deficits have caused strains in bond markets, reflecting worries about the possibility of default and the ability of investors to digest the surge in supply.

In Europe, borrowers like Ireland and Greece have come under particular strain. There has been speculation that the government in Britain — where the budget deficit is projected to rise above 13 percent of gross domestic product next year — may face more severe balance of payments difficulties.

A recent report by Variant Perception, a research firm based in Charlotte, N.C., said the British fiscal situation was “already on a par with some of the worst financial crises in the postwar period that have precipitated currency crises.”

Mr. Strauss-Kahn acknowledged the dangers. “I understand the concerns about deficits and they are not unfounded,” he said. “Defaults, of course, are a concern, but they are not likely.”

He stressed that in the event of extreme strains in government bond markets, systemically important borrowers would find support either from multilateral lenders or central banks.

He also acknowledged concerns about commercial banks becoming too dependent on ultracheap financing from the major central banks.

Over all, he said, the fund was more confident about the global outlook than it was in September, when it last released economic projections. This suggests that, excluding a dip in activity in December, it would raise its key forecasts in the update in January. “The U.S. recovery appears to be stronger than we thought in September,” he said. “What I see in the global figures now is that things are moving faster than expected.”

Regarding currency adjustments, Mr. Strauss-Kahn said that the euro appeared “somewhat overvalued,” while the renminbi was “still undervalued.” A rise in the value of the Chinese currency would be a logical element in the country’s “shift from an export-driven economy to one that was more dependent on domestic demand,” he said.

The I.M.F. has been asked by the Group of 20 to study ways to allow banks to pay for their own bailouts. It is expected to report on the matter in April. One option it will examine is a tax on financial transactions.

Meanwhile, the announcement last week by Hungary that it would forgo the next installment of an I.M.F. loan was “the best news of the year,” Mr. Strauss-Kahn said. Other countries in the region — like Ukraine, Latvia, Romania and Serbia — still face “challenges,” he said.

After the crisis, the I.M.F. will continue to offer technical advice and training as well as taking “a more formal role linked to the G-20 as a kind of think tank and institution to help implement the follow-up to G-20 meetings,” he said. Further out, it may even become a lender of last resort.

http://www.nytimes.com/2009/11/25/business/global/25imf.html?ref=economy