policy makers should devise an “exit strategy” from their emergency moves for when the crisis passes

TO BE NOTED: From Bloomberg:

"IMF Considers Bond Issue to Raise Funds for Lending Programs

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By Timothy R. Homan

April 26 (Bloomberg) -- The International Monetary Fund is considering selling bonds to several developing countries to raise money to combat the global economic slump.

China and Brazil are among a handful of nations that have expressed interest in purchasing the securities, which would give member states a different way to contribute to the Washington-based fund. The IMF has never before issued bonds.

The IMF is seeking more cash to finance loans and aid to member countries during worst economic slump in the fund’s 64- year history. As the institution taps some of its 185 members for additional cash injections, emerging economies say they want more decision-making power at the fund, setting up a possible clash with the rich nations that run it.

“I’m sure that this vehicle will be used,” IMF Managing Director Dominique Strauss-Kahn told reporters yesterday in Washington during meetings of the IMF and World Bank, referring to the bonds. “Now we’re discussing with different creditors the way to implement it and the amount that we put in it.”

Bonds would offer “flexibility,” he said, and their interest rate would be pegged to the value of the IMF’s basket of currencies, known as Special Drawing Rights or SDRs.

Still, Brazilian Finance Minister Guido Mantega on April 24 dismissed the substance of the IMF’s capital-raising bond sale proposal as “insufficient” and “premature.”

Higher Yields

Brazil would want higher yields than those attached to U.S. Treasuries to buy the new IMF securities, Mantega said after meeting with his counterparts from Russia, India and China at the IMF’s headquarters. The yield on the benchmark 10-year Treasury note rose five basis points, or 0.05 percentage point, last week to 3 percent, according to BGCantor Market Data.

Mantega said any contribution by the four largest developing nations would be “provisional,” pending reforms that increase their say in IMF decisions.

Contributions should be directed mainly to help emerging markets weather the global credit crisis, Mantega said, rather than to simply “strengthen the current structure of the fund.”

Less than a month after the Group of 20 advanced and emerging economies pledged to boost funding for the IMF, some officials say member states aren’t making adequate contributions. Canadian Finance Minister Jim Flaherty yesterday said some G-20 nations aren’t doing their “share” to provide new emergency assistance funding for the IMF.

The IMF said it has received $324.5 billion in commitments from G-20 members since mid-March. Leaders of the G-20 agreed to triple the fund’s lending capacity to $750 billion when they met in London on April 2.

‘Immediate Financing’

The IMF’s policy steering committee yesterday agreed to a $250 billion increase in the fund’s resources through “immediate financing” from members, according to the group’s communique released in Washington.

U.S. Treasury Secretary Timothy Geithner said that governments “should act quickly” to boost the fund’s resources. The Obama administration is seeking approval from Congress to contribute up to $100 billion.

Geithner said in a statement that he also supports a push to “realign” power at the fund in a way that benefits emerging markets. He also proposed a reduction in the size of the IMF’s executive board next year to 22 from 24 to “better reflect the realities of the global economy.”

That number should fall to 20 by 2012, he said. Such a shift must come while maintaining representation for emerging market and developing countries, he said, risking a quarrel with European counterparts who might lose representation as a result.

‘Exit Strategy’

Strauss-Kahn also told reporters there is broad agreement among IMF members that fiscal stimulus measures in individual countries were necessary, while saying policy makers should devise an “exit strategy” from their emergency moves for when the crisis passes. He also said “everybody agrees” that cleansing banks’ balance sheets is essential to spur a recovery.

European officials this weekend questioned IMF estimates that toxic assets plaguing financial institutions would force their banks to write down $750 billion through next year amid global losses forecast to total $4.1 trillion.

“With regards to Europe, because of the methodology, in our view we do not have an entirely convincing analysis,” European Central Bank President Jean-Claude Trichet told reporters in Washington on April 24 after a meeting of Group of Seven finance chiefs. French Finance Minister Christine Lagarde said “many among us expressed our greatest reserve on the methodology adopted by the IMF.”

‘Implicitly’ Suggested

Bank of France Governor Christian Noyer said it was “implicitly” suggested to the IMF to “forget this type of exercise.” At the same time, everyone agrees on the advice the fund gave for the financial system to be “operational” and correctly capitalized again, he said.

The IMF said April 21 that its calculations showed banks in the 16-nation euro-area would need to write down more than the U.S.’s $550 billion by the end of 2010. The next day the fund said in a forecast that the global recession will be deeper and the recovery slower than previously thought, as financial markets take longer to stabilize.

The global economy will shrink 1.3 percent this year compared with a January prediction of 0.5 percent growth, the IMF said.

Police yesterday arrested seven people in Washington for rioting and assault in the vicinity of the IMF and World Bank meetings, police spokesman Quintin Peterson said.

Six people were arrested for destruction of property, including attacks on bank branches of PNC Financial Services Group Inc. and Wachovia Corp., Peterson said. Another person was arrested for assaulting a police officer, he said.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net"

Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jumpstart stalled economies

Gary Duncan on The Times with the head of the IMF's take on the EU Stimulus:

"Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday."

I guess you could say that this is one of my main concerns.

"Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.

The broadside from the IMF's managing director came as fears over a protracted global recession, and political fallout, mounted after China said that its factories' output registered the weakest growth in almost a decade last month.

Without swifter and more determined action by governments to boost economies, a world recovery could be delayed until late next year or early in 2010, with grave consequences, Mr Strauss-Kahn said. “A lot remains to be done, and if this work is not done it will be difficult to avoid a long-lasting crisis that everyone wants to avoid.”

I tend to agree with him.

"The IMF has called for governments in leading economies to spend a combined 2 per cent of global GDP, or $1.2 trillion (£1,075 billion), to try to fend off the danger from global recession.“If we are not able to do that, then social unrest may happen in many countries - including advanced economies,” Mr Strauss-Kahn suggested.

He also claimed that violent protests could break out in countries worldwide if the financial system was not reordered to benefit everyone rather than a small elite."

This is one of my main fears.

"Reinforcing anxieties over a global recession, the IMF chief said that the fund would probably cut its current 2.2 per cent forecast for world growth next year. He blamed governments' being unwilling or unable to use more public funds to bolster economic activity. At the same time, he also predicted that China's once red-hot pace of economic expansion was now set rapidly to run out of steam.

“We started with China at 11 per cent growth . . . China will probably grow at 5 or 6 per cent [next year],” he said. “The possibility of a global recession is real. We realise something must be done.”

Concern over China was heightened as industrial output growth from the Asian powerhouse slowed to an annual pace of only 5.4 per cent last month. That was sharply from 8.2 per cent in October and the weakest since 1999."

This seems to be occurring.

"Turning his fire on the European Union, Mr Strauss-Kahn put himself sharply at odds with Jean-Claude Trichet, President of the European Central Bank, who yesterday urged European leaders to stick to their fiscal rule books and keep a lid on state borrowing, even as they deliver packages of economic stimulus measures.

Mr Trichet called for European countries to stick by the EU's controversial Stability and Growth Pact that limits governments' borrowing and total debt. But Mr Strauss-Kahn said that existing rule books should be scrapped, and demanded new rules to match the scale of the economic threat he saw."

I understand Trichet's caution, but believe he underestimates the seriousness of the problem.

“We are facing an unprecedented decline in output and we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures,” he said, “What was decided by Brussels . . . 1.5 per cent of GDP in the form of stimulus, is a bit below what we need.”

His comments come amid continued wrangling and sharp clashes between European leaders over how they should react to the crisis."

I'm not convinced that it's all real

"Germany has expressed substantial doubts over the wisdom of pumping huge amounts of public money into economies to try to stimulate growth and has resisted pressures to contribute more to a joint EU effort.

Peer Steinbrück, the German Finance Minister last week delivered an outspoken attack on tax and spending-led stimulus measures generally, and Britain's in particular.

“The same people who would never touch deficit spending are now tossing around billions,” he told Newsweek, in an interview. “The switch of supply-side politics all the way to a crass Keynesianism is breathtaking.” Discussing Britain's cut in value-added tax, he added: “All this will do is raise Britain's debt to a level that will take a whole generation to work off.”

He's as good an act as Yosano.