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World: Official Defends Tough IMF Policies

Washington, 23 January 1998 (RFE/RL) -- The second ranking official at the International Monetary Fund says the IMF's tough demands of countries in financial crisis are necessary because to do less would invite serious global crises.

First Deputy Managing Director Stanley Fischer says that for the international community to stand aside and simply "let the chips fall where they may would surely cause more bankruptcies, larger layoffs, deeper recessions and even deeper depreciations than would otherwise be necessary to put these economies back on a sound footing."

Speaking to a conference of the U.S. Banker's Association for Foreign Trade in Washington Thursday, Fischer defended the role of the IMF as the international community's resource for dealing with financial difficulties wherever they arise.

He said the fund's demand for quick action, such as when it assembled financial assistance packages in recent months for Thailand, Indonesia and South Korea, is the only possible approach.

A sharp, but temporary increase in interest rates to stem the outflow of capital, while making a decisive start on the longer-term tasks of restructuring the financial sector, improving banking supervision, and increasing domestic competition and transparency, are all necessary, he said.

These are not easy and unfortunately tend to slow the pace of economic activity, said Fischer. But he added: "The slowdown would be much more dramatic, the costs to the general population much higher and the risks to the international economy much greater without the assistance of the international community provided through the IMF."

Fischer also scoffed at allegations that the IMF's moves to assist countries in crisis has created what is called a "moral hazard" that leads nations to take risky moves knowing that the IMF will save them in the end.

The notion is "far-fetched," says Fischer, because "no country would deliberately court such a crisis even if it thought international assistance would be forthcoming." He said the "economic, financial, social and political pain is simply too great." Countries show no great desire to enter IMF problems unless they "absolutely have to," Fischer added.

Fischer also addressed growing criticism in the American congress that U.S. and other western taxpayers are having to pay the bill for saving these economies in crisis.

"The IMF is not a charitable institution," said Fischer, "nor does it carry out its operations at taxpayers' expense." Instead, he said the fund operates "much like a credit union," where each country, upon joining, subscribes a sum of its money, called its quota. When a member borrows from the fund, he said, it exchanges a certain amount of its own national currency for the use of an equivalent amount of currency of a country in a strong external position. The borrowing country pays interest on the amount it has borrowed while the country whose currency is being used receives interest.

Fischer said the Asian crisis has had an impact on other countries around the world and that some of the contagion reflected "rational market behavior." However, he said, the drop in value of the currencies in Asia now "far exceeds any reasonable estimate of what might have been required to correct the initial overvaluation" of the Thai, Indonesian and Korean currencies. These currencies are now grossly undervalued, he said, because markets "overreacted."

The IMF's role, said Fischer, is to encourage all of its members to pursue sound economic policies, to open their economies to trade and investment and to seek to avert crises by warning when trouble threatens. But he said that since not all crises can be anticipated, the IMF must be able to step in and help, as it did in the energy crisis of 1973-74, the debt crisis of the mid-1980s and its help to the 26 former communist countries that "cast off the shackles of central planning" in the early 1990s. Without IMF assistance, said Fischer, "things would have been much worse."