Impossible M Ission F Inance

Sydney Morning Herald

Saturday October 10, 1998

JENNIFER HEWETT

While the people who control the big money dicker about what to do, the world's poor continue to get poorer, reports JENNIFER HEWETT.

THE news from the International Monetary Fund is not encouraging for anyone hoping for quick fixes to the global contagion. The most substantive outcome of the annual meetings of the IMF and the World bank was the relatively modest proposal to improve the financial information available to investors. Transparency is the new fashionable world in financial circles.

That may be a good idea, but it is hardly one that will help calm shattered nerves in the next few months.

Everyone sombrely agreed that the financial market turmoil was increasing the chances of a global recession and threatening the whole system.

What to do about this was far less clear. The prospect of generally reducing interest rates to restore growth does now seem to be more likely. Even the hard-line Germans suddenly started sounding more flexible about the idea after hearing the arguments in Washington.

The US Federal Reserve, having just cut its own rates by a quarter of a percentage point, is clearly contemplating further action if the US economy weakens. Beyond that, however, the road map to the future looks a lot more confused.

President Bill Clinton is still pushing the principle of allowing an emergency line of credit to countries under threat even though they are following fundamentally sound economic policies.

During the week, scepticism that the US idea would actually work was compounded by the failure of the US Congress to approve money for the IMF despite increasingly frantic please from the Clinton Administration.

A last-minute deal with the Republicans to get the money through in exchange for toughening the conditions of IMF lending will help. But it is clear that there will be no big injections of extra money to ease widespread credit crunches.

The more limited aim is to get together a package of money to stabilise Brazil - the key to holding the contagion at bay in Latin America.

That package now seems feasible with the newly re-elected government promising to follow IMF policies in cutting its deficit, continuing to reform its economy and avoiding controls on capital.

But no-one can be confident that it will work if the global markets suddenly turn the full force of their nervousness against Brazil and create a self-fulfilling crisis as the Government tries to defend its currency. Nor is it an answer to the sudden drying up of credit to all countries that are even vaguely at risk.

Even US businesses are finding that loans and bond offerings are no longer quite so easy to arrange. Everywhere else - from Indonesia to Argentina - fundraising is almost impossible, despite punishingly high interest rates.

That suggests that, for all the talk about the need to impose controls on short-term capital, the real need for the moment is to figure out how to get more money in rather than how to limit it.

Japan's proposal of a $US30 billion package of assistance to its neighbours will help that process, but it is still dwarfed by the amounts needed.

Although Clinton talked of the need to get credit moving again and to get corporations out from under the debt that is crushing them, little progress seems to be being made on this.

The US, anxious to avoid any more radical solutions like controls, is suggesting that the private sector needs to become more involved in helping to pay for the costs of rescues and providing an exit.

So far, there is a distinct dearth of volunteers. The big banks and hedge funds are all nursing their wounds.

In the meantime, the poor are getting poorer. The head of the World Bank, James Wolfensohn, said that too little attention was being paid to the growing numbers of unemployed and the escalating misery.

"The poor cannot wait on our deliberations," he said.

They seem to have little choice.

© 1998 Sydney Morning Herald

Back to News Index | Back to Home