Washington: The International Monetary Fund, or IMF, may need an additional $150 billion (Rs7.29 trillion) to help counter the hit to emerging markets and poorer countries from a worsening global downturn, managing director Dominique Strauss-Kahn said.
In an interview in Washington, the IMF chief also chided European leaders for failing to grasp the depth of the coming slump in their region, creating the risk of social upheaval. IMF will make a significant increase in its $1.4 trillion projection of global financial losses and write-downs, he added.
Chiding Europe: IMF’s Dominique Strauss-Kahn says Western European governments are behind the curve in implementing stimulus packages. Chris Kleponis / Bloomberg
The remarks by Strauss-Kahn may help to build momentum for proposed stimulus packages in Germany and France. They also indicate that the fund may put pressure on countries with large foreign exchange reserves—such as China and Saudi Arabia—to step up contributions.
“If in six months from now the crisis has worsened and many other of our members need our help, the demand may be above what we have,” Strauss-Kahn said in a 9 January interview. “If the political decision is made to do something, I’m convinced it will not be difficult to find the extra $150 billion that would double the lender’s resources compared with a year ago, to a total of $500 billion,” he said.
He warned there will be a drop in IMF’s economic forecasts. In November, IMF predicted global growth of 2.2% this year, with US gross domestic product (GDP) shrinking by 0.7%, Japan’s by 0.2% and the euro area’s by 0.5%.
Strauss-Kahn, 59, has already overseen the steepest jump in fund commitments in its six-decade history. IMF agreed to lend $41.8 billion to troubled economies in November, its largest monthly pledge on record. While Japan in November pledged an additional $100 billion to boost fund resources, other countries have yet to commit to help.
Much of the aid so far has been allotted for Eastern European nations, where policymakers beset by budget deficits and sliding currencies have struggled to contain the economic slump. Strauss-Kahn spoke before departing on a trip that includes a stop in Budapest on Tuesday.
In western Europe, governments are behind the curve in implementing stimulus packages and are still underestimating the needs, said Strauss-Kahn. The full impact of the downturn has yet to hit the region, he said.
German lawmakers are deliberating a second stimulus package in two months, of as much as €50 billion (Rs3.25 trillion). In France, President Nicolas Sarkozy last month laid out a proposed €26 billion initiative—including infrastructure investment, tax breaks for small businesses, rebates for car purchases and a €200 payment for 3.8 million impoverished households.
Thomas Mayer, co-chief global economist at Deutsche Bank AG, estimated that, on an equivalent basis, European plans will likely amount to about 1.5% of GDP, less than half the 3.6% boost the US will probably get from a stimulus.
“In the coming months, I am afraid that the psychology will be the same in Europe as in the US,” said Strauss-Kahn, who was France’s finance minister from 1997 to 1999 and sought the Socialist Party’s nomination to run for president in 2007. “A rate of growth between minus 1% and minus 2% may have some really strong social consequences.”
Greece last month was racked by violence when killing of a teenager by police set off days of protests that increasingly focused on the government’s economic policies.
Strauss-Kahn also expects the European Central Bank (ECB) to lower interest rates further. ECB meets on 15 January, and economists and investors anticipate a 0.5% cut in the benchmark rate to 2%.
The IMF chief didn’t specify what steps ECB ought to take beyond lowering rates.
In the US, President-elect Barack Obama is seeking authorization from Congress for about $775 billion to fund tax cuts and spending on everything from roads and schools to the energy network. He is aiming to save or create three million jobs in an economy that lost about 2.6 million jobs last year.
The Obama administration and the outgoing administration have really taken the measure of the push that is needed, Strauss-Kahn said. However, he warned that tax cuts might have very little impact on growth unless targeted only at the most vulnerable, who are likely to spend the extra cash.
Turning to Russia, the IMF chief played down concern about a collapse in the nation’s economy, saying its currency reserves—which amounted to about $438 billion in December—offer a safeguard. The huge amount of reserves that it has puts Russia in a position where it should not be afraid of too big a destabilization of its economy.