IMF Chief Urges Changes to Monetary System to Prevent Crises

International Monetary Fund Managing Director Dominique Strauss-Kahn urged policy makers to strengthen the global monetary system to correct flaws that could pave the way for the next crisis.

“Global imbalances are back, with issues that worried us before the crisis -- large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves -- on the front burner once again,” Strauss-Kahn said in the text of a speech in Washington today. “Left unresolved, these problems could even sow the seeds of the next crisis.”

His comments echoed calls by French President Nicolas Sarkozy, who has made the issue a pillar of his agenda as he holds the Group of 20 nations’ rotating presidency. Finance ministers and central bankers from the club of developed and emerging economies will renew attempts to coordinate their economic policies when they meet next week in Paris.

Strauss-Kahn said growth can be bolstered by enhancing international cooperation, reducing volatility in capital flows and exchange rates and ensuring liquidity is available to countries that need it.

“When we worry about the deficiencies of the international monetary system, we are mostly worrying about volatility,” Strauss-Kahn said. There is “a sense that money sometimes flows around the globe in too-volatile a fashion and that countries need a more stable, more predictable external environment in order to prosper.”

Another way to achieve this stability would be to give a greater role to special drawing rights, the IMF basket of currencies that its members use to settle accounts with each other, he said.

Artificial Currency

Ideas include increasing the global stock of SDRs, using the artificial currency to price trade, and issuing SDR-denominated bonds, he said.

Adding emerging markets’ currencies, including the Chinese yuan, “could help the process of internationalization of these currencies, which would benefit the system as a whole,” Strauss-Kahn said.

Russian President Dmitry Medvedev last month said the currencies of Brazil, Russia, India and China should be included in the SDR valuation basket. The same month, Sarkozy said that the yuan should be included, and U.S. President Barack Obama’s administration said it supports such a transition “over time.”

G-20 officials are working on developing early warning indicators to help identify large imbalances in the global economy and actions needed to fix them. Sarkozy is also seeking to give IMF a surveillance authority on capital flows and to have the institution define guidelines on how countries should deal with them.

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