By Krishna Guha in Washington
April 6 2008
SourceGovernment intervention at a global level is required to tackle the credit crisis, according to the head of the International Monetary Fund, who has warned that market turmoil will take a serious toll on world growth.
Dominique Strauss-Kahn, IMF managing director, told the FT: “I really think that the need for public intervention is becoming more evident.”
Government intervention – whether in the securities market, the housing market or the banking sector – would act as a “third line of defence” supporting monetary and fiscal policy, he said.
The controversial call comes days before world finance ministers and central bank governors meet in Washington DC for the spring meetings of the IMF and World Bank. Policymakers will discuss the credit crisis and steps to address it.
Until now authorities, particularly in the US, have employed increasingly aggressive measures to support market liquidity but stopped short of intervention in the financial system – with the exception of the rescue of Bear Stearns last month.
In recent months finance ministries and central banks have been exchanging ideas behind the scenes on possible interventions as part of contingency planning. Most policymakers, including those in the eurozone and the US, do not believe broad public intervention is yet necessary.
Mr Strauss-Kahn’s call will increase pressure on them to act. The Institute of International Finance, an association representing big banks, last week said there was a “growing case” for government intervention.
Mr Strauss-Kahn, a former French finance minister, rubbished the notion that the credit crisis was largely a US problem. “The crisis is global,” he said. “The so-called decoupling theory is totally misleading.” Developing countries such as China and India would be affected.
Public intervention would provide a third line of defence by tackling the housing and credit problem directly, he said.
“Effort has to be made on loan restructuring. With respect to the banks, if capital buffers cannot be repaired quickly enough by the private sector, use of public money can be examined.”
The IMF would this week revise down its global economic forecasts to below the current private and official consensus, he said. “The forecasts we are going to release in a few days are not very optimistic. The downside risks we underlined in the last world economic outlook have materialised.”
He said central banks around the world were constrained in their ability to battle the growth risks by high commodity prices.
IMF analysis suggests that the US and other countries that account for an additional 20 to 25 per cent of the world economy are in strong enough financial positions to provide additional fiscal stimulus if required.
But the IMF estimates that other countries, including most in Europe, are not in such a position.
Copyright The Financial Times Limited 2008