New US Treasury Secretary Paul O’Neill has indicated his scepticism that IMF bail-out packages can deal effectively with financial crises. “Why do we have to intervene? Especially, why do we have to intervene on a crisis basis? [Crises] are great media fodder, but they’re not real hot for anybody else,” he told the Financial Times.
Although sceptical, O’Neill has been careful not to rule out US involvement either in coordinated currency market intervention or leadership in IMF bail out operations. The first test of his resolve may be Turkey. Whilst bail-outs may send the wrong signals to the financial markets, leaving Turkey to face the heat alone could add to growing instability in the region and contradict other US foreign policy objectives. Turkey has been in discussions with the US government as well as the IMF and Word Bank about a possible $10-12 billion loan to help resolve its crisis. O’Neill, however, claims Turkey’s earlier deal with the IMF is sufficient.
O’Neill prefers more focus on crisis prevention. Making a veiled attack on the IMF, he commented to Agence France Presse “With the knowledge and understanding available today, the international community should be able to do a better job of anticipating weaknesses and undertaking necessary steps to keep crises from taking full form.” He has called on the Fund to publicise “key indicators of potential trouble.”
O’Neill may be appeased by the IMF‘s announcement that it is establishing a Capital Markets Department which will monitor capital and currency markets to improve its capacity to spot early signs of crisis. But it is unlikely that the IMF will publish a “hot list” of potential crisis countries for fear of destabilising markets.
A new report from the Bretton Woods Project and Oxfam, Go with the Flows? Capital Account Liberalisation and Poverty, calls for more technical assistance and resources to allow governments themselves to monitor capital flows to determine their impacts on the economy.
Meanwhile, members of a US congressional commission, the “Meltzer Commission”, which last year recommended radical reforms at the World Bank and IMF, have again called for deeper reforms at the institutions. Addressing the Joint Economic Committee (JEC) of Congress in March, Allan Meltzer, suggested that the major shareholders of the Bretton Woods institutions should require an independent management audit to appraise the World Bank and order a performance audit of Bank lending and aid.
Go with the Flows? Capital Account Liberalisation and Poverty, Bretton Woods Project and Oxfam-GB