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Dominique Strauss-Kahn, managing director of the International Monetary Fund (c) meeting Prime Minister Lee Hsien Loong of Singapore, Singapore, Feb 02, 2011.
Dominique Strauss-Kahn, managing director of the International Monetary Fund
(IMF), warned on Thursday that lack of action to reform the international
monetary system could sow the seeds of the next crisis, and he called for
renewed international cooperation for a better and stronger global recovery.
“Global imbalances are back, and issues that worried us before the crisis
- - large and volatile capital flows, exchange rate pressures, rapidly growing
excess reserves—are on the front burner once again,” Strauss-Kahn said
during a panel discussion on the international monetary system held at the IMF
in Washington, DC. He said that “reforms to the international monetary system
could both bolster the recovery and strengthen the system’s ability to prevent
Mr. Strauss-Kahn emphasized three areas of reform in particular:
Strengthening policy cooperation. Just as cooperation helped
pull the global economy out of the crisis, the managing director said further
cooperation can now lay the foundations for more stable global growth. He
pointed to the G-20’s Mutual Assessment Process (MAP) - - as as an important
first step toward creating more permanent frameworks for global policy
cooperation - - and to the IMF’s Financial Sector Assessment Programs and new
reports on the spillover effects of countries’ policies on one another, as
measures in train to strengthen surveillance.
Reducing capital flow and exchange rate volatility.
Countries’ policy responses to inflows of capital have an impact on other
countries, Strauss-Kahn noted. He said that the Fund is looking at these issues
including whether there was a need for globally agreed “rules of the road”
for managing capital flows.
Enhancing liquidity provision in times of extreme volatility.
The global financial safety net has been strengthened in the wake of the crisis.
Strauss-Kahn noted, for example, the introduction of the Flexible Credit Line
and Precautionary Credit Line by the IMF. Another avenue worth exploring, he
said, is how to “strengthen partnerships with regional financing
Potential Role of the SDR in strengthening the international monetary
system. Over time, Strauss-Kahn said that there may be a greater
role for the IMF’s international reserve asset, called the Special Drawing
Right, or SDR, to contribute to a more stable monetary system. Although a number
of obstacles remain in the way, increasing the global stock of SDRs could help
alleviate global imbalances by reducing the need for an excessive buildup of
reserves, he said. He added that issuing SDR-denominated bonds could create a
potentially new class of reserve assets, and that use of the SDR to price global
trade and denominate financial assets would provide a buffer from exchange rate
Strauss Kahn concluded that the reform of the international monetary system
is not something academic or abstract: “It is linked to achieving the kind of
well-balanced and sustainable recovery that the world needs and it is linked to
preventing the next crisis.”