IMF failure 'could cause global economic crisis'

FE Team | Published: October 22, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Eoin Callan
FT Syndication Service
WASHINGTON: The failure of the IMF to agree reform increased the risk of a "huge" global economic "crisis" brought about by the disorderly unwinding of global economic imbalances, said David Dodge, governor of the Bank of Canada.
"We didn't make any progress this weekend," said Mr Dodge, adding that it was a "pretty big disappointment" and that IMF stakeholders had not "settled even the principles let alone the details" of institutional reform.
The central banker said the continued stand-off over reform would undermine the IMF's ability to go on and play a bigger role in bringing about an orderly realignment of international currency imbalances.
"This is precisely the time we need the fund's ability and skills to deal with global imbalances," he said, adding that the breakdown in reform efforts had decreased the "chance of coming to a common view across the fund's membership" on currency policy.
"The longer the imbalances go on, the greater risk that we will end with a rather messy dÃ©nouement," he said.
He said it was inevitable that imbalances would be resolved, but that the question was "whether we end with some huge bloody crisis" or "whether we can do it in a reasonably smooth manner so that the world can continue to grow and roughly its potential".

He warned that a disorderly unwinding would increase protectionism and lead to policies that could "undermine the benefits of the global financial and trading order we have enjoyed over the past two decades".
He said he didn't want to single out China, and said the imbalance rested with a number of currencies, including South East Asia, South Korea, and Japan. He added that these countries faced the risk of rapidly rising inflation if imbalances were not addressed.
Jean Claude Trichet, the head of the European Central Bank, said: "Certain areas of the regulatory framework may need to be reviewed, such as the treatment of liquidity risk and securitisation framework, in particular the treatment of liquidity exposures to special purpose vehicles and the assessment of risk transfer, given their significance in the recent financial turbulence."