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To: Enigma who wrote (18844)	9/14/1998 5:25:00 PM
From: goldsnow	Read Replies (1) \| Respond to of 116759

Mea culpa: IMF failed Asian test By Michael Dwyer The International Monetary Fund has admitted that it failed to anticipate much of Asia's financial turbulence, imposed excessively harsh policies on economies in crisis and lacked the expertise to deal with many of the region's problems. The global agency has also acknowledged that the Asian crisis, and ensuing financial turmoil in other areas, has been such a drain on its resources that it has less than $US9 billion ($15 billion) to lend to economies needing emergency funding. And it has warned that the huge drain on its funds over the past year will make it much harder to respond effectively to new problem areas emerging in the world economy - particularly in Latin America. The IMF's candid assessment of its own role in the Asian financial crisis is contained in the 1998 annual report of the agency's executive board, released yesterday in Washington. The report includes a frank admission by the IMF that it was "taken by surprise" by many of the events in Asia over the past year and that the design of its emergency rescue programs for countries like Indonesia were seriously flawed. "With hindsight, it was clear that the affected countries' vulnerabilities had been underestimated, including by the markets," the IMF report says. The report also shows there has been considerable debate within the IMF over whether it should condone the use of exchange rate controls by developing countries to regulate short-term capital flows as a way of easing pressure on their currencies. But the most alarming issue that the latest annual report has raised is the potential problems the IMF would face if a major bailout of Latin American economies was required in the near term. The IMF's deputy managing director, Mr Stanley Fischer, told a press conference in Washington the agency had less than $US9 billion to lend to countries in need. Mr Fischer said the recent instability in Latin American markets meant it was imperative the US Congress approve a further $US18 billion contribution to the IMF. "The situation in the global economy unfortunately, very regrettably, is becoming extremely difficult and the resources now available are limited in ways that are unhelpful to increasing confidence in the international system," he said. The release of the IMF annual report came just a day before Group of Seven deputy finance ministers met in London to discuss ways in which to stabilise the Russian economy and to prevent further destabilisation of global markets. The report acknowledges that the IMF's performance in identifying problem areas in Asia had been mixed, noting that it had not attached "sufficient urgency" to the financial tensions which were emerging in South Korea in early 1997. The IMF appeared to have been more aware of the risks in Thailand's economic policy course than were most market observers. "In other cases in Asia, however, the IMF - while having identified critical weaknesses, particularly in the financial sector - had been taken by surprise, owing in part to the lack of access to requisite information and also to an inability to see the full consequences of the combination of structural weaknesses in the economy and contagion effects." But the IMF noted that it had to learn "valuable lessons" from the Asian crisis, including the design of its rescue programs and the need for greater collaboration with other international institutions like the World Bank. The report acknowledged that the tough fiscal conditions which it placed on some Asian countries as part of their rescue packages was an inappropriate policy response. "Attempts at complying with a fiscal rule through excessive reliance on tax rate increases and unsustainable or cosmetic expenditure cuts, or one-off measures, might tend to be counter-productive," it conceded. It said some IMF directors "questioned the need for significant tightening of fiscal policy since Asian economies in crisis generally did not suffer from fiscal imbalances". The report also highlighted the need for more expertise within the IMF on financial sector reform, which is more properly the domain of the World Bank. The annual report shows member countries drew about $US25.6 billion from the IMF's general resources account in the 12 months to April 1998 - nearly four times the level of the previous year. The IMF report pointed out the intensity of the debate over the role which capital controls could play in a new global financial architecture. "A number of directors saw merit in imposing selective capital controls to limit the severity of the currency depreciation in the aftermath of an exchange rate crisis, as well as to reduce the risks of crises in the first instance," the annual report said. "Several other directors, however, cautioned that such controls were likely to be ineffectual beyond the short run and could even prove counter-productive, by leading to a surge in capital outflows." IMF, short of cash and credibility, has its own crisis afr.com.au

To: Enigma who wrote (18844)	9/14/1998 5:29:00 PM
From: goldsnow	Respond to of 116759

Jitters increase as Brazil falters By Matthew Doman, Mexico City Latin American governments are again preparing defensive strategies to bolster their economies against a slump in international investor confidence, as worries mount over an imminent devaluation in the region's largest economy, Brazil. Those worries heightened sharemarket volatility late last week, when the Sao Paulo stockmarket slid almost 16 per cent on Thursday and rebounded 13 per cent on Friday. Foreign investors pulled an estimated $US2.6 billion out of Brazil over that two-day period. While the worldwide nervousness in emerging financial markets has swept right across Latin America, Brazil and neighbouring Venezuela are seen as the region's softest fronts as it battles to avoid a repeat of the 1994-95 "tequila crisis". That crisis began with a widely expected but botched devaluation of the Mexican peso in the days before Christmas 1994. The flow-on effects sent Mexico into its deepest recession in 60 years, knocked the steam out of encouraging recoveries in Argentina and Brazil and slowed investment across Latin America. Concern over Brazil's ability to maintain the value of the real - the new currency, generally regarded now as overvalued, that was introduced in 1994 as a central plank of a successful anti-inflation package - has risen in recent months, as has the country's fiscal deficit, now sitting at 7 per cent of GDP. The concerns are exacerbated by the fact the country must pay $US87 billion in domestic debt by the end of October, just weeks after President Fernando Henrique Cardoso, the architect of Brazil's still-new economic stability, faces re-election on October 4. Despite public pledges from IMF chief Mr Michel Camdessus that the fund is ready to bolster its support to Latin America, and rumours that a $US15 billion G7-sponsored support package for Brazil could be announced this week, many see a devaluation as unavoidable, and dangerous for the rest of the region. "To the extent that Brazil falls, it will drag everyone else down," said Mr Carlos Samano, research director of the broking operation of Mexican bank Bancomer. Analysts worry that a devaluation in Brazil would probably produce a deep recession, pointing to the contraction of more than 6 per cent in Mexico's economy after the 1994 peso collapse. Recession in Brazil would have a strong negative effect on its partners in the Mercosur trade bloc - Argentina, Paraguay and Uruguay - and associate members Chile and Bolivia. "The crisis in Brazil will oblige us to take measures that we do not like," said Argentina's Economy Minister, Mr Roque Fernandez. The region has had a rocky ride in 1998 after last year's Asian financial crisis quickly dampened confidence in Latin America. Foreign investment in the Mexican stockmarket fell 46.7 per cent in the first eight months of the year. For Mexico, and particularly Venezuela, the effects of the market slide were exacerbated by the weakness of international oil prices. Both countries depend heavily on revenue from State-owned oil companies to fund fiscal budgets. While Mexico has been forced to cut its fiscal spending plans three times this year, and seen its free-floating currency slide around 20 per cent, it is Venezuela, where the economic reform embraced by the rest of the region has been limited, which is seen as of more concern. The Governor of Mexico's Central Bank, Mr Guillermo Ortiz, said his country was in good shape to handle any outcome. "We have faced many worse crises," he said, highlighting much stronger foreign reserves than in the lead up to the 1994-95 crisis. "This time nobody is saying that Mexico could go broke." afr.com.au