ECONOMY

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04 April 2007
IMF Urged To Engage Private Sector To Avert Financial Instability

Washington — Geopolitical instabilities, large trade imbalances and increased use of new, untested financial instruments are putting pressure on global financial markets and call for more cooperation among governments, public institutions and the private sector, says a leading financial organization in Washington.

In a letter sent April 4 to Gordon Brown, who serves as the chief of the International Monetary and Financial Committee (IMFC), the Institute of International Finance (IIF) called on the International Monetary Fund (IMF) to “reassert its leadership in our collective efforts to underpin global financial stability.”

Brown is the United Kingdom’s chancellor of the exchequer (finance minister), The IMFC guides IMF policy.

“The time is ripe for the IMF to deepen its engagement with private finance,” said IIF Managing Director Charles Dallara in a press conference.

The IMF and the World Bank hold their spring meetings in Washington April 14 – 15. The IIF traditionally presents the IMF with a policy letter with thoughts and recommendations on the state of global finance prior to the meetings.

The IIF says global economic growth continues to be strong and likely will be close to 5 percent in 2007. Net private capital flows to emerging markets are at a record annual level of $500 billion, in comparison with $112 billion in 2002. But recent instances of market volatility and downward adjustments in global asset prices create a sense of vulnerability and confusion among economic entities, IIF says in the letter.

Global economic performance “seems clouded by concerns relating in part to geopolitical problems, in part to persistent global imbalances, and also accompanied by anxieties having to do with systemic implications of a rapid growth of complex financial instruments,” Dallara said.

Investors’ search for new opportunities, combined with technological advances in market globalization, led to the development of innovative instruments, such as derivatives, which derive their value from other financial instruments, or hedge funds, which make huge speculative investments in nontraditional areas, the IIF letter says.

Although those instruments generally contribute to liquidity, diversification of risks and better allocation of resources, they also “have not been tested during times of stress,” the letter says. Along with some uncertainties about the outlook of the U.S. economy, trade imbalances and other worrying economic trends, they have created what the IIF letter calls “an unusual sense of unease and anxiety amidst prosperity.”

To strengthen market confidence, the IIF proposes senior-level annual meetings between private-sector leaders and the IMFC and development of joint expertise on issues such as hedge funds, economic reform in emerging markets and debt sustainability. It also calls for IMF’s stronger involvement in the implementation of the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets.

The Principles are a voluntary set of standards adopted by debtor countries and private creditors in 2004. They include requirements for transparency, regular debtor-creditor dialogue, sanctity of contracts, and collaborative, nondiscriminatory debt-restructuring processes.

To prevent potential periods of instability, disorderly adjustments and risk-aversion, international financial organizations, especially the IMF, should work to “recognize the reality of market dynamics and to reach out to market players and market forces in a more systematic way,” Dallara said.

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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