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IMF Managing Director Dominique Strauss - Kahn, in dialogue with HotNews.ro readers: "I am sure Romania is on its best way towards fiscal stability and sustainable growth"

de A.C.     HotNews.ro
Marţi, 30 martie 2010, 8:56 English | Top News

Dominique Strauss-Kahn, IMF Managing Director answers questions posed by HotNews.ro readers before his visit to Romania. It is for the first time when the IMF chief interacts with readers of a publication in Romania. Strauss-Kahn talked about the origins of the economic crisis, the measures Romanian took or about the speculations on weak currencies.


1.      You previously said that the probability of a future crisis is high. What kind of crisis will it be? Here, we talk about a debt crisis or one regarding inflation and unemployment. How can a state protect itself from a future crisis? (By I.B.)

We all know that the global financial crisis had its roots in excess risk taking and leverage in the financial sector.  It is very important to address this problem and go ahead with reforms to make the financial sector safer. Another aspect of the crisis has been the sharply rising public debt among advanced economies. If nothing is done to rein in debt, the next crisis could well be fiscal.  What countries need to do now is to communicate fiscal consolidation strategies, and to start implementing them.

This global financial crisis has shown that countries with sufficient fiscal cushions were able to use that room effectively to stimulate and counteract the negative impact of the crisis on economic growth. So it is key for countries to create this fiscal space when they can in preparation for severe economic downturns.

Particularly in Central and Eastern Europe, countries have weathered the crisis very differently. Many—like Romania—suffered severe downturns. We have seen that what makes a difference in terms of a country’s response to the crisis has been the quality of its economic policies and institutions.  In the case of Romania, the government very wisely sought the support of the international community before the full effects of the crisis had hit, and it was the government that proposed the key elements of the economic policies agreed upon. As a result, Romania was spared an even worse downturn, and is now undertaking reforms that will leave it in a stronger position.

2.      Considering today’s economic and social conditions, which are similar to those after the 1929 crash, do you think a new economic world order is needed? (By Vali)

The Great Depression of the late 20s and early 30s was quite different from what has happened more recently.  A big part of the difference is the cooperative global response. Governments and central banks around the world were swift to deploy all of the monetary and fiscal tools in their arsenal. Countries, acting together, delivered a global fiscal stimulus of 2 percent of GDP in 2009. They also came together to support a very large increase in IMF resources of more than $750 billion.

Leaders had clearly learned the lessons of the Great Depression. The lesson I have drawn is that international collaboration must be a key element. We have clearly shown that countries acting collectively and in collaboration successfully avoided another Great Depression.

3.     What does the IMF do to prevent and discourage international speculators from shorting one currency or another? (By Eufrosin) How does the IMF intend to regulate financial markets to reduce speculation against the euro? (By Yellowdog)

For governments, it is most important to focus on increasing the transparency of financial markets, and in particular more complex segments such as the Credit Default Swap market. In our policy advice to individual member countries and in multilateral surveillance, we strongly promote actions to improve the functioning of markets. This includes collecting more information on exposures, ensuring regulatory consistencies across financial products, and strengthening supervisory oversight.

In general, we need to do a much better job of tracing how risk percolates through the system. Although the Fund is not a financial market regulator, we need to be able to construct a global risk map. We are already working with our partner, the Financial Stability Board, to find ways to improve the availability and monitoring of financial sector data. And this work will be critical in helping to better assess financial risks.

4.     In times when liquidity and infusion of capital is vital for the markets to overcome the current economic crisis, would you encourage the governments in Central and Eastern Europe to be more open to foreign investors, which can attract the much needed cash? (By Corneliu Manole)

Generally capital inflows are welcome, but how governments should respond to them depends on the nature of capital inflows and domestic policy considerations. Emerging Europe experienced a generous inflow of foreign money in the years before the crisis, which caused a credit boom as banks lent to households and firms on an unprecedented scale. When the crisis hit, it became clear that these large capital flows to the region were unsustainable and destabilizing, although the outflow of foreign capital was relatively limited.

This showed that sudden and temporary surges can pose economic and financial challenges. Governments have a number of tools available to respond to capital inflows. They can allow the currency to appreciate, accumulate more reserves, adjust fiscal and monetary policies, strengthen prudential rules to prevent excessive risk in the financial system; and impose capital controls.

The right policy mix will depend on each country’s circumstances. In the face of large inflows, standard economic and prudential tools may not be sufficient or appropriate. Capital controls may be a legitimate component of the policy response to surges in capital inflows in some circumstances. In any event, a country’s policies to control the inflow of capital need to take into account the multilateral consequences.  This is a matter of pragmatism, not ideology.

5.     What is the biggest danger for the emerging economies such as Romania: Inflation? Deflation? What can IMF do to solve the fiscal problems? ( By Alex)

It is hard to point to one unique danger. Emerging market countries’ situations differ and face different challenges.

In the case of Romania, inflation has been falling but still remains high compared to other European Union countries. The National Bank of Romania’s emphasis on bringing the inflation rate down over time is very appropriate. Lower inflation will support a more competitive economy by keeping production costs down and, moreover, it will safeguard the value of workers’ paychecks.

The IMF has worked very closely with the Romanian authorities in addressing the country’s fiscal problems. When the economic crisis hit, financial support from the IMF, and its partner in the EU and the World Bank, helped finance the fiscal deficit and avoid an even sharper economic downturn. The government’s plan to reduce the fiscal deficit over time is comprehensive, and I am confident that Romania is on the right track to fiscal stability and sustained growth.

6.     Why does the IMF obligate our country to implement IMF-desired economic policy and doesn’t let our country act freely? (By Dares)

Countries call on the Fund like people call on a doctor. When a country is dire straits it needs to adjust economic policies to deal with the downturn. This can be challenging because not only is the country in a crisis, it also needs to make tough decisions to rein in spending and return to a stable financial position. To cushion that adjustment period, governments from member countries often approach the IMF for financial help.

The government proposes and implements the economic policies that will get the country out of the crisis.  The Fund’s focus in its consultations with the government is that the economic program addresses the core and immediate problems that have led to the difficulties.  At the same time, it tries to ensure that the economic adjustments—for example cutting back the overall level of government spending—take into account the impact on the poor and actions are taken to protect the most vulnerable.

We know the challenges and choices being faced by the authorities are indeed very difficult and that unemployment can be a real problem. We share the same objective as the countries we work with –to promote sustainable growth that can create jobs and lead to higher living standards in the country. That is the ultimate objective of our financial support.

7.     What would be the impact of IMF monetary assistance on the Romanian plan to join the euro some time in the period 2010-2014? (By Marian)

The policies included in the IMF-supported program are necessary to address the country’s economic challenges, regardless of whether or not it joins the euro area.  That said, reducing the fiscal deficit and bringing inflation down—cornerstones of the IMF-supported program—are also essential ingredients for Romania to qualify for participation in the euro area.

8.     Can you tell us about an example of real success of a program supported by the IMF—the Argentine crisis springs to mind as less-than a success? (By Ironfist)

Let’s look at the most recent crisis programs. It is far too early to claim victory, but I do think you can see some elements of success, especially given the context of what countries were facing not very long ago.

Emerging markets were facing a cut-off in financing, or were suffering from sharp drops in exports, remittances and foreign direct investment, and needed external support. IMF lending was large relative to past crises.  

And I do not hesitate to say that the impact of economic adjustment by countries in crisis would have been even more difficult without Fund support. I see that as a measure of success. Now there is certainly much more to be done by countries to make sure they are safely out of the woods, but we have clearly helped make that path a bit easier.

We have also made important changes in how we lend. Agreed measures taken under the loan arrangements with the Fund are more streamlined and focused on core problems. We have raised the lending limits and made access to lending easier and more flexible.  And we are committed to help protect the most vulnerable in supporting countries' reform programs.

9.      At the moment, the only way for U.S. to pay its debt is to issue more debt (or print money). Why doesn’t the U.S. have to take the IMF medicine—like budget austerity, reductions of public expenses, etc.? Is this medicine good for others, but not for the U.S.? (By Razvan M)

The IMF has long urged the US to take steps to bring down its fiscal deficit, once the need for stimulus has ebbed. In addition, we have called for fiscal adjustment plans to be formulated and disseminated now, to underpin confidence in fiscal sustainability. Once recovery is firmly underway, bringing the US budgetary position under control will be essential to underpin global economic growth and stability.

For all countries, the immediate priority is to maintain the global recovery. At the same time, it is also urgent to formulate, communicate, and begin to implement exit strategies from crisis-related intervention policies. But the timing of policy shifts depends on country circumstances, particularly the pace of recovery in the country and the government’s debt position.

Fast-growing emerging markets can begin exiting now. Most advanced countries—like the U.S.—should maintain stimulus in 2010 and begin exiting in 2011, and in some cases, market concerns imply that tightening will be needed ahead of recovery. We have set out some general principles to help guide policymakers in designing exit strategies for fiscal, monetary, and financial policies. We are also providing more detailed advice to individual members through our regular surveillance of member countries.

One thing I would like to emphasize is that the international linkages in exiting are important.  The Fund can help facilitate policy coordination which can lead to better outcomes for all.


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