Global imbalances back, IMF Managing Director warns

14.02.2011 13:12
Global imbalances back, IMF Managing Director warns

YEREVAN, February 14, /ARKA/. “Global imbalances are back, with issues that worried us before the crisis—large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves,” IMF Managing Director Dominique Strauss-Kahn said at a panel discussion at the IMF in Washington, D.C.

He cited volatile capital flows, pressures on currencies and growing reserves as issues of concern. One way to improve the international monetary system would be the increased use of the IMF's currency, the special drawing rights, to create a new reserve asset class.

Strauss-Kahn said, "the recovery underway today is not the recovery we wanted. Unemployment remains at record highs, with widening income inequality adding to social strains.

"In my opinion, reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system's ability to prevent future crises."

Countries are building high levels of reserve to protect against a sudden reversal of capital flows, which reflects a lack of confidence in the capacity of the "global financial safety net," Strauss-Kahn said. SDRs could be a factor in dealing with this issue, since they could be used as precautionary reserves, and "Using the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility," he said. In addition, "Issuing SDR-denominated bonds could create a potentially new class of reserve assets," although he noted "I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy."

The IMF released a paper Thursday examining how increased use of SDRs "could contributed to a more stable international financial system," he said.

However, in a discussion with fellow panelists following the discussions, Strauss-Kahn said the idea of the increased use of the SDR would not be geared to replacing any one currency as a reserve currency, but simply aimed at strengthening the international system. Coping with capital flows and exchange rate volatility is another challenge that can "complicate macroeconomic management and threaten financial stability, especially in countries whose financial sectors lack depth," Strauss-Kahn said. Since individual country actions "can have a significant impact on others," he said the IMF is studying whether it would help to create "globally agreed 'rules of the road' for managing capital flows." -0-

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