–Developping New ‘Precautionary Crefit Line’ Facility

By Yali N’Diaye

WASHINGTON (MNI) – Despite downside risks, the global recovery will
continue without a double dip, the International Monetary Fund’s
Managing Director Dominique Strauss-Kahn said Tuesday.

Speaking during a lunch-time event at the Peterson Institute, he
also announced the institution is working on developing a
“precautionary” credit line at the regional level for those countries
who do not qualify for the flexible credit line.

Strauss-Kahn’s remarks otherwise focused on the reform of the IMF,
both through modernizing its mandate and improving its governance.

“The recovery will go on without a double dip,” he told economic
experts in the audience.

In light of a series of disappointing economic data in the U.S. and
other countries, including in the emerging market sphere, some private
economist who had previously ruled out the double-dip scenario no longer
do.

Asked about his own view, Strauss-Kahn said he is sticking to the
IMF’s view that a double dip recession is not the base line scenario
despite downside risks.

Some of the latter come from the drag on economic growth that could
come from exiting accommodative fiscal policies worldwide after stimulus
packages were implemented during the crisis to avoid a deep recession or
a depression.

But asked whether the G20’s focus on fiscal consolidation was
inappropriate and if growth should have been center stage, Strauss-Kahn
supported the G20.

“Fiscal consolidation is needed everywhere” and the G20 communique
was “rather good,” he said, referring to the communique following the
meeting in Toronto, Canada last weekend.

He said the problem is not to choose between fiscal consolidation
and growth, but to have both fiscal consolidation and economic growth,
with each country consolidating its public finances at its own pace.

Strauss-Kahn also downplayed the risk that global imbalances
intensify again as the euro currency weakens with the economy, boosting
trade surpluses, adding to Asia’s surpluses while the U.S. ends up as
the consumer of last resort, widening its already large deficits.

“It’s certainly a concern,” Strauss-Kahn said, but the question is
how much of a concern, adding no one knows where the euro will head.

And his answer was “I don’t see this as a big threat for the
future.”

Besides, he noted for instance that Germany’s trade surplus is
largely vis-a-vis other euro zone countries.

In addition, he noted that China did implement a stimulus package
during the crisis, which goes in the right direction in terms of relying
more on its domestic consumption for growth and less on exports.

And while the renminbi’s revaluation might have been at a slow pace
so far, he still took it as a positive sign.

He also stressed that G20 leaders are understanding the need for
coordination, noting the latter is “alive” and could boost global growth
by 2.5% over the next five years.

And coordination should also help reduce imbalances as opposed to
acting on an individual basis, Strauss-Kahn said, adding, the IMF is a
good platform for such international coordination.

While “we may be at a turning point in economic cooperation,”
countries generally need to deliver on their announced policies at the
individual level, Strauss-Kahn stressed.

Yet the “G20 should have more defined rules” and should better
represent African countries, Strauss-Kahn said.

For its part, the Fund needs to modernize its mandate and improve
its governance as the global economy is transforming.

In particular, the IMF needs a new “tool kit” both for surveillance
and for lending support to needing countries.

To that effect, he announced the IMF is working on developing a
“precautionary credit line” that would be accessible to countries who do
not qualify for the flexible credit line, which also needs to be
improved, he said.

Conditions to qualify for this lending facility would be “less
strict” than those for the flexible credit line but it would include a
set of conditionalities.

He did not give details about how this precautionary lending
facility would work or be triggered, but hoped it would be ready by
November, when the next G20 takes place in Seoul.

Overall, Strauss-Kahn stressed the need for his institution to
adopt a more multilateral approach, in addition to continuing, and
improving, bilateral surveillance.

** Market News International Washington Bureau: 202-371-2121 **

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