EU Finance Ministers Debate New Financial Order

By THE ASSOCIATED PRESS
Published: November 3, 2008
Filed at 11:59 a.m. ET

BRUSSELS, Belgium (AP) — EU finance ministers on Monday opened two days of talks aimed at crafting proposals for a new global financial order as the gloom in world markets hung over the euro-zone economy’s outlook.

As the ministers arrived, forecasts published by the European Commission painted a bleak portrait of the region’s future. They predicted the economy of the 15 countries using the euro was probably already in recession and would expand by just 0.1 percent in 2009.

The euro-zone’s largest members — Germany, France and Italy — will come to a standstill or shrink, it said, warning of a deeper credit crunch that would brake the economy, strain government finances and put a near-freeze on household spending.

With that dire situation to grapple with, ministers were eager to find an agreement on what should be done to reverse — or at least contain — the turmoil that has driven growth down sharply in Europe.

EU officials said European governments were beginning to rally around a consensus to boost the role and powers of the International Monetary Fund to support faltering economies — an issue that will top the agenda of a Nov. 15-16 summit in Washington of G-20 countries, which includes the G-7 industrialized democracies as well as developing powers such as Brazil, India, Russia and China.

The IMF has already dipped into its $250 billion reserves to provide emergency loans to Iceland, Hungary and Ukraine totaling $30 billion. Pakistan has said it may call on the international body for another $5 billion.

British Prime Minister Gordon Brown was in the Middle East on the weekend to push Arab nations into providing hundreds of billions of extra dollars to the IMF, saying the current fund was not enough.

European governments have taken the lead in stabilizing the financial system by injecting scores of billions of dollars into failing banks and mortgage lenders. They called on the financial sector to do its share and end behavior that encouraged reckless risk-taking.

Dutch Finance Minister Wouter Bos said Monday that bankers had to change risk and reward systems — or governments would force them to. In an editorial in Monday’s Financial Times Deutschland, he said a risk manager could be made a member of a company’s board with veto power, and that salary structures could be placed under regulatory supervision.

The finance ministers will debate ways to make global financial markets more transparent and accountable ahead of a meeting of the 27 EU leaders on Friday.

The G-20 Washington summit will debate an update of financial rules created in 1944 at Bretton Woods, New Hampshire, that helped nations cope with economic problems following World War II. That conference led to the creation of the IMF and World Bank.

France is pushing for the Washington summit to make concrete reforms, saying they could agree to coordinate regulation for multinational finance groups, to supervise credit rating agencies more closely and tackle risk-taking in the financial sector.

German Finance Minister Peer Steinbrueck said he broadly agreed with the French suggestions. But Britain is cooler, saying it thinks it is too soon to sign up to specific rules when global talks are just beginning.

The financial crisis and the economic downturn that has followed it have led governments to inject huge sums of money to prop up faltering financial institutions.

European carmakers are seeking a similar bailout of 40 billion euros ($50 billion) in soft loans to help them create greener vehicles. France wants EU governments to create state-run investment funds to defend companies against unwanted foreign takeovers.

Neither proposal is likely to be supported. Germany and several other countries, diplomats said, see both as politically undoable.

France, officials said, will again push for reduced value added (sales) taxes, especially restaurant bills, to stimulate economic growth. Germany, Denmark and Baltic EU states oppose this for fear of losing revenue that, in turn, means less public spending.

http://www.nytimes.com/aponline/business/AP-EU-EU-Financial-Crisis.html

Pakistan Link

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Strauss-Kahn said the IMF should not be considered simply as a “fireman” that comes to the rescue of distressed countries at times of emergency, but that the Fund also wanted to be a “mason” with a role in rebuilding economic growth.

“The IMF’s role as the coordinator of global regulation must be reaffirmed,” Strauss-Kahn said.

“To that effect, I will propose at the G20 a plan for a new governance, or a ‘global regulation strategy’, based on five principles,” he told the newspaper.

These would include a new type of loan to relieve short-term liquidity problems in some economies, and an increase in IMF resources which Strauss-Kahn said were insufficient to meet requirements over the medium term.

Other principles were to understand how economic policies had contributed to repeated “bubbles” that hurt economies when they burst, to oversee new financial regulation, and to devise a new, simpler and more efficient global economic “architecture”. (Reporting by Estelle Shirbon and James Mackenzie, editing by Mike Peacock)

http://www.reuters.com/article/governmentFilingsNews/idUSLU28886120081030

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Dominique Strauss-Kahn : “Je proposerai au G20 un plan de nouvelle gouvernance mondiale”

LE MONDE | 30.10.08 | 10h35  •  Mis à jour le 30.10.08 | 10h58

Washington, envoyé spécial
lanchi par son conseil d’administration de l’accusation d’abus de pouvoir dans le cadre de sa liaison avec une de ses subordonnées, Dominique Strauss-Kahn, le directeur du Fonds monétaire international (FMI), rebondit. Il a retrouvé le dynamisme qui lui avait permis, depuis un an, de commencer à réformer la représentativité et les finances du Fonds.

Au plus fort de la crise financière, il a encouragé les gouvernements à mettre sur pied des plans globaux prévoyant la recapitalisation des banques en difficulté. Le 15 novembre, à Washington, il proposera au G20 un plan de nouvelle gouvernance mondiale baptisé “Global regulation strategy” pour en finir avec les “bulles” à répétition qui détruisent l’économie réelle.

Quand finira la descente aux enfers des Bourses mondiales ?

L’extrême volatilité des marches montre que la crise financière continue à produire ses effets. J’ai bon espoir que cette volatilité se calme parce que les plans financiers américain et européen sont solides ; il leur faut juste un peu de temps pour donner leur pleine mesure.

Je suis plus préoccupé, en revanche, par le ralentissement de l’économie mondiale et ses conséquences sociales. C’est pourquoi le FMI ne peut pas se contenter d’être le pompier qui aide les pays à redresser leurs balances de paiement, il revendique le rôle du maçon qui aide à reconstruire la croissance. En 2009, nous prévoyons une croissance mondiale de 3 %, soit 0 % pour les économies avancées et de 6 % à 7 % pour les pays émergents. Dès le mois de février, j’ai d’ailleurs conseillé à ceux d’entre eux qui le pouvaient de prévoir un soutien budgétaire conjoncturel.

Vous avez été longtemps silencieux. Pourquoi n’est-ce pas vous qui avez élaboré le plan Brown qui a servi de modèle aux autres plans de sauvetage ?

Mais vous ne savez pas tout et c’est normal ! Quand une crise bancaire se déclenche à l’intérieur d’un pays, le FMI n’a pas de rôle direct, mais prodigue des conseils aux gouvernements. Munis de l’analyse unique de 122 crises passées, nous avons martelé deux recommandations. D’abord, en finir avec le cas par cas et mettre au point un plan global ; ensuite, recapitaliser les banques, parce qu’injecter de liquidités ne peut suffire. Jusqu’à la mi-septembre, l’efficacité commandait la discrétion. Depuis, ayant été entendus, nous avons pu parler publiquement.

Que pensez-vous de la proposition de Gordon Brown de faire du FMI une banque centrale mondiale dotée de moyens financiers renforcés ?

Gordon Brown a raison de vouloir réformer l’architecture financière mondiale. Avec la mondialisation, quand l’immobilier s’effondre en Virginie, la Hongrie en pâtit, parce que la chute du secteur résidentiel américain met en difficulté les banques américaines, puis toutes les banques de la planète qui rapatrient leur argent chez elles et coupent les crédits aux pays les plus lointains. L’effet domino se met alors en place. Le FMI peut y parer.

Pour cela, il faut que son rôle de coordonnateur de la régulation mondiale soit réaffirmé – telle est d’ailleurs l’approche de Nicolas Sarkozy. Je proposerai ainsi au G20 un plan de nouvelle gouvernance, ou “global regulation strategy”, autour des cinq axes suivants :

1/Mettre au point un prêt nouveau qui permette de soulager les problèmes de liquidités à court terme que rencontrent certaines économies : nous venons d’en définir les caractéristiques.

2/Augmenter les ressources du FMI qui peuvent devenir insuffisantes face à l’ampleur des besoins à moyen terme : c’est ce que propose Gordon Brown.

3/Tirer les leçons des politiques économiques qui ont conduit à ces “bulles” à répétition dont l’éclatement détruit l’économie réelle : c’est la mission qui nous a été confiée, il y a quelques jours, par les 185 pays membres du Fonds.

4/Surveiller la mise en place des nouvelles régulations financières élaborées, avec le FMI, par le Forum de stabilité financière, qui regroupe principalement les grandes banques centrales.

5/Aider à repenser un système mondial plus cohérent parce que plus simple, plus efficace parce que plus coordonné. Au-delà de son rôle de pompier et de maçon, le FMI peut aussi avoir, pour un temps, un rôle d’architecte.

Qu’attendez-vous de la réunion du G20 à Washington, le 15 novembre ?

La mesure de la situation historique que nous vivons. Et donc une impulsion décisive, à partir du document que nous lui soumettrons sur les leçons de la crise, pour la réforme de la gouvernance mondiale.

C’est une perspective que les Américains sont réputés ne pas apprécier…

Beaucoup de choses changent en ce moment. A des degrés divers, tous les pays – y compris les Etats-Unis – reconnaissent que le marché ne fonctionne que s’il est organisé et qu’on ne peut attendre aucun bienfait de la mondialisation si ses défauts ne sont pas corrigés.

Notre assemblée du 11 octobre à Washington a marqué un tournant dans ce domaine : nos 185 pays membres ont accepté à l’unanimité un système coopératif qui a ensuite aidé les Européens à être unanimes à Paris, le 13 octobre. Vous vous souvenez que, quelques jours auparavant, tout le monde ne jurait que par le prisme national…

Vous notez aussi que ce sera un G20 et non un G8 qui se réunira à Washington, le 15 novembre, parce que tous les responsables ont pris conscience que l’économie mondiale ne se réduit plus aux seuls pays riches. Pour ma part, je rappelle sans relâche qu’il y a une autre crise derrière la crise financière : celle que vivent les pays pauvres, frappés de plein fouet par le renchérissement des matières premières et des produits alimentaires. Dans les pays développés, la crise signifie baisse du pouvoir d’achat; chez les plus démunis, elle veut dire risque de famine pour certains, malnutrition pour beaucoup et séquelles pour toute une génération.

L’enquête interne demandée par votre conseil d’administration sur un incident de votre vie privée vous a lavé de l’accusation d’abus de pouvoir. Votre crédibilité et celle du Fonds n’en sont-elles pas affectées ?

Cette enquête a été conduite par un organisme indépendant dont les conclusions sont claires et nettes. Comme l’a dit le conseil d’administration du FMI : “L’incident est clos”.

Pour ma part, je suis pleinement dans l’action pour apporter des solutions aux problèmes économiques et financiers de la planète. D’ailleurs, le FMI n’est déjà plus le même qu’il y a un an quand j’y suis arrivé. Il est plus représentatif : la réforme des droits de vote, dont on parlait depuis des années, a été adoptée au printemps et aura à terme des effets considérables. Il est plus efficace : les 500 salariés qui nous ont volontairement quittés donnent une marge pour en embaucher une centaine d’autres qui vont nous aider pour nos nouvelles missions.

Il est plus respecté : l’Asie et l’Amérique latine ne sont plus en délicatesse avec le FMI, qu’elles accusaient d’éteindre les incendies au prix d’une régression économique et sociale. Il est enfin plus pragmatique : autant il serait absurde de prêter de l’argent aux Etats sans conditions, autant ces conditions ne doivent plus découler d’une ligne idéologique mais des besoins des pays. Le FMI a tiré les leçons de ses erreurs passées. J’ai plus que jamais l’ambition de continuer de le réformer pour lui faire jouer un rôle original dans ce nouveau contexte historique.
Propos recueillis par Alain Faujas

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Le FMI
Les missions. Le Fonds monétaire international a été créé, comme la Banque mondiale, à Bretton Woods (Etats-Unis), en 1944. Il a vocation à analyser et à surveiller les déséquilibres de change et de balances de paiement. Il prête les sommes nécessaires aux pays en difficulté : l’Islande (2,1 milliards de dollars), l’Ukraine (16,5 milliards) et la Hongrie (8,1 milliards) en sont les derniers bénéficiaires.

Les membres. Le FMI compte 185 membres dont les droits de vote et les droits à emprunter sont calculés en fonction de leur produit intérieur brut. Une réforme est intervenue au printemps, qui a donné plus de poids à la Chine, à l’Inde et au Mexique notamment.

Les salariés. Afin de réduire le déficit de 100 millions de dollars prévu en 2008-2009, le FMI a mis en place un plan de départs volontaires qui fera partir 500 de ses 2 900 salariés.

Les réserves. Le FMI est en mesure de prêter 250 milliards de dollars. Selon Dominique Strauss-Kahn, cela “ne suffira peut-être pas”, si le Fonds est appelé à soutenir la croissance mondiale par des aides budgétaires à ses pays membres.

http://www.lemonde.fr/la-crise-financiere/article/2008/10/30/dominique-strauss-kahn-je-proposerai-au-g20-un-plan-de-nouvelle-gouvernance-mondiale_1112710_1101386.html#ens_id=1112672

Kenneth N. Klee
Partner
(310) 407-4080
(310) 407-9090 fax
kklee@ktbslaw.com

http://www.thedeal.com/corporatedealmaker/2008/10/imf_chief_to_le_monde_ill_prop.php

IMF chief to Le Monde: I’ll propose a new plan for global regulation

Posted on October 30, 2008 at 10:40 AM Filed under: Crisis On Wall Street | Deal International Tagged: dominique strauss-kahn , international monetary fund

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Questions abound regarding the meeting of G-20 heads of state on the global crisis scheduled for November 15 in Washington. British prime minister Gordon Brown and French president Nicolas Sarkozy have set lofty expectations for the meeting and follow-on work, with talk of a “new Bretton Woods.” Meanwhile more technocratic types, while acknowledging the need for a political foundation for change, fret about grandstanding. They also point to the tough technical work on the world’s financial plumbing–much of it already underway in goups such as the Financial Stability Forum, working under the aegis of the Bank for International Settlements–required for a real fix. How then to take the remarks of International Monetary Fund managing director Dominique Strauss-Kahn in an interview in Thursday’s Le Monde, which come on top of the IMF’s announcement yesterday of a $100 billion short-term funding facility–and a streamlined way of accessing it–for developing countries judged to have good economic policies in place? The headline on the English-language wires is Strauss-Kahn’s promise to offer a new plan for global regulation at the Nov. 15 meeting. But there’s a lot more in the interview. At times he sounds expansive–for example, saying that the IMF can have, at least for a while, the role of an architect, not part of its mandate in the past. That plays well in France because the IMF is led by a Frenchman and is an organization where Europeans hold plenty of sway. And of course, Strauss-Kahn hopes to be president of France someday. Yet he also acknowledges the work of the Financial Stability Forum, which gathers senior reps from many different financial authorities and institutions around the world, and which has already weighed in on such crucial but arcane topics as bank capital adequacy standards and the need for a clearing house for swaps. There’s an interesting mix of politics and practicality–both of them essential ingredients in this process–on display. Whether it’s the right mix we’ll have to see.-Kenneth Klee

 

 

Washington Post
White House welcomes IMF chief’s views at summit
Reuters - 2 hours ago
The White House has declined any public comment on the investigation launched in August by the IMF board of member countries, which includes the United …
Bretton Woods, The Sequel? Washington Post
Amid the rubble of global finance, a blueprint for Bretton Woods II guardian.co.uk
all 4 news articles »

http://www.reuters.com/article/bondsNews/idUSN2252066720081022

White House welcomes IMF chief’s views at summit
Wed Oct 22, 2008 2:40pm EDT
By Tabassum Zakaria

WASHINGTON, Oct 22 (Reuters) - The White House on Wednesday said it welcomed the participation of International Monetary Fund chief Dominique Strauss-Kahn at a global leaders financial summit next month, but avoided commenting on an IMF investigation into his possible abuse of power.

The White House has declined any public comment on the investigation launched in August by the IMF board of member countries, which includes the United States, into whether Strauss-Kahn abused his position in an affair with a former IMF economist.

The investigation is looking into whether the senior economist received preferential treatment before she took a buyout in August. The former French finance minister is also being questioned about the hiring of a young French intern at the fund who worked on one of his political campaigns.

Strauss-Kahn, who was invited to attend a global summit on the financial crisis in the Washington area on Nov. 15, “has a great deal of experience in these issues and we welcome him at the table for these discussions,” White House spokesman Tony Fratto said in response to a question about the investigation.

Fratto, speaking at the Foreign Press Center, praised the IMF for its work in dealing with financial crises in emerging economies over recent decades, and said its participation can inform the discussions and decisions of world leaders on how to address the current crisis and prevent future ones.

France, Germany and Britain have called for an overhaul of the current international financial architecture established just after World War Two at the 1944 Bretton Woods conference, where the IMF and World Bank were created.

Asked about views that the Bretton Woods system should be reformed or replaced, Fratto said he could not speak for the next U.S. president, who will take office on Jan. 20. But he said there was a “misconception” about the Bretton Woods system.

“We had a system that came out of that conference that broke down nearly four decades ago,” Fratto said. “And so it’s hard for anyone to talk today about a present Bretton Woods system, it just simply doesn’t exist as it did coming out of the Bretton Woods conference at that time,” he said.

Since that time, other economic institutions have risen to play a key role in the global economy, such as the World Trade Organization, Fratto said.

“It’s a very different time today,” he said. “I know that individual countries have different feelings about the IMF and how it should operate.”

He said the IMF had done an “excellent job” in trying to promote economic growth and encouraging trade and investment. (Editing by Neil Stempleman)

© Thomson Reuters 2008. All rights reserved.

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http://www.washingtonpost.com/wp-dyn/content/story/2008/10/19/ST2008101901455.html

In Good Times and Bad
By Robert J. Samuelson
Monday, October 20, 2008; A15

A dozen years ago, James Grant — one of the wisest commentators on Wall Street — wrote a book called “The Trouble With Prosperity.” Grant’s survey of financial history captured his crusty theory of economic predestination. If things seem splendid, they will get worse. Success inspires overconfidence and excess. If things seem dismal, they will get better. Crisis spawns opportunities and progress. Our triumphs and follies follow a rhythm that, though it can be influenced, cannot be repealed.

Good times breed bad, and vice versa. Bear that in mind. It provides context for today’s turmoil and recriminations. The recent astounding events — the government’s takeover of Fannie Mae and Freddie Mac, the Treasury’s investments in private banks, the stock market’s wild swings — have thrust us into fierce debate. Has enough been done to protect the economy? Who or what caused this mess?

We Americans want instant solutions to problems. We crave a world of crisp moral certitudes, but the real world is awash with murky ambiguities. So it is now. Start with the immediate question: Has enough been done? Well, enough for what? If the goal is to prevent a calamitous collapse of bank lending, the answer is probably yes.

Last week, the government guaranteed most interbank loans (loans among banks) and pressured nine major banks to accept $125 billion of added capital from the Treasury. Together, these steps make it easier for banks to borrow and lend. There’s less need to hoard cash. But if the goal is to inoculate us against recession and more financial turmoil, the answer is no.

We’re probably already in recession. In September, retail sales dropped 1.2 percent. The housing collapse, higher oil prices (now receding), job losses and sagging stocks have battered confidence. Consumer spending may have dropped in the third quarter for the first time since 1991. Loans are harder to get because lax lending standards have been tightened. Unemployment, now 6.1 percent, may reach 7.5 percent or higher by the end of next year.

Similar qualifications apply to financial perils. “The United States has an enormous financial system outside the banks,” says economist Raghuram Rajan of the University of Chicago. Consider hedge funds. They manage perhaps $2 trillion and rely heavily on borrowed money. They’ve suffered heavy redemptions ($43 billion in September, reports the Financial Times). Selling pressures could destabilize the markets. There’s also a global spillover. Brazil’s stock market has lost about half its value since the spring.

In this fluid situation, one thing is predictable: The crisis will produce a cottage industry of academics, journalists, pundits, politicians and bloggers to assess blame. Is former Fed chairman Alan Greenspan responsible for holding interest rates too low and for not imposing tougher regulations on mortgage lending? Would Clinton Treasury Secretary Robert Rubin have spotted the crisis sooner? Did Republican free-market ideologues leave greedy Wall Street types too unregulated?

Some stories are make-believe. After leaving government, Rubin landed at Citigroup as a top executive. He failed to identify toxic mortgage securities as a big problem in the bank’s own portfolio. It’s implausible to think he’d have done so in Washington. As recent investigative stories in the New York Times and The Post show, the Clinton administration broadly supported the financial deregulation that Democrats are now so loudly denouncing.

Greenspan is a harder case. His resistance to tougher regulation of mortgage lending is legitimately criticized, but the story of his low-interest-rate policies is more complicated. True, the overnight Fed funds rate dropped to 1 percent in 2003 to offset the effects of the burst tech bubble and the Sept. 11 attacks. Still, the Fed started raising rates in mid-2004. Unfortunately and surprisingly, long-term interest rates on mortgages (which are set by the market) didn’t follow. That undercut the Fed and is often attributed to a surge of cheap capital from China and other Asian countries.

There’s a broader lesson. When things go well, everyone wants on the bandwagon. Skeptics are regarded as fools. It’s hard for government — or anyone — to say: “Whoa, cowboys; this won’t last.”

As the housing boom strengthened, existing home prices rose 50 percent from 2000 to 2006. Investment bankers packaged dubious loans in opaque securities. To their eventual regret, bankers kept many bad loans. Almost everyone assumed that home prices would rise forever, so risks were considered minimal. Congress allowed Fannie and Freddie to operate with meager capital. Congress also increased the share of their mortgages that had to go to low- and moderate-income buyers, from 40 percent in 1996 to 52 percent in 2005. This promoted subprime mortgage lending.

So Grant’s thesis is confirmed. We go through cycles of self-delusion, sometimes too giddy and sometimes too glum. The consolation is that the genesis of the next recovery usually lies in the ruins of the last recession.

Further banks may fail, says IMF

More European banks could fail before the financial crisis ends

More European banks “may fail” as doubts persist about the viability of their business models, the International Monetary Fund has warned.

Private funding is “virtually unavailable” and banks will have to rely on public intervention, asset sales and consolidation, it said.

The six-monthly study also warns that eurozone economic growth will almost grind to a halt next year.

Growth in the 15 euro countries will fall to just 0.2% in 2009, it forecast.

The report argued that disruptions in the US financial system have “heightened the risk of a systemic financial crisis in Europe further”.

However, it maintained that a full-blown crisis “remains improbable”.

Economic slowdown

The slowdown has resulted from high oil prices, rising inflation, a strong euro, falling export demand and the financial crisis, the Fund reported.

However, amid the gloom, inflation will slow next year - allowing room for cuts in interest rates, it forecast.

Meanwhile, the Icelandic government has said it hoped to reach an agreement on an economic rescue loan from the IMF this week.

“We hope an agreement with the IMF can be reached today or tomorrow,” said commerce minister Bjoergvin Sigurdsson after a cabinet meeting on Tuesday.

If Iceland does receive a loan from the IMF, it would be the first Western country to do so since 1976.

Inflation eases

The IMF said growth in the eurozone would be 1.3% this year and just 0.2% next year - down from 2.6% in 2007.

“While these projections were finalised before the crisis reached systemic proportions in early October, they remain broadly valid,” the IMF said in a statement.

Europe’s biggest economy, Germany would see no growth at all in 2009 after expanding by 1.8% this year, while France would grow by just 0.2% after gaining 0.8% in 2008.

However as Europe’s economies slow, price rises will ease, allowing the European Central Bank scope to cut interest rates, says the IMF.

“While containing inflation remains a policy concern, nurturing the recovery is likely to gain policy prominence,” it said.

http://news.bbc.co.uk/2/hi/business/7682371.stm

Pakistan Needs $10 Billion to Avoid Default, IMF Says (Update1)
By Matthew Brown and Khalid Qayum

Oct. 21 (Bloomberg) — Pakistan may need as much as $10 billion from donors over the next two years to avoid defaulting on its debts, the International Monetary Fund said.

The government of Pakistan calculated “they needed financing somewhere in the region of $3 billion to $4 billion,” IMF Regional Director Mohsin Khan said in an interview in Dubai yesterday. “We thought that it was closer to $5 billion; $5 billion this year and $5 billion next year.”

Pakistan’s foreign reserves have plunged more than 74 percent to about $4.3 billion in the past year, increasing the risk that the country will be unable to pay the $3 billion in debt-servicing costs due in the coming year. Officials from Pakistan and the IMF are meeting in Dubai today to work out what can be done to help South Asia’s second-largest economy.

“Considering the geopolitical importance of Pakistan in the global war against terror, it seems logical to expect Pakistan’s allies to help the government manage short term and temporary liquidity problems,” said Asad Farid Khwaja, an economist at AKD Securities in Karachi.

The rupee had its biggest gain in seven years yesterday on optimism a bailout may help avert a crisis. Pakistan came off its last IMF program in December 2004. The currency rose for a second day today, increasing 0.4 percent to 80.90 per dollar at 11:00 a.m. in Karachi.

`Precarious Situation’

President Asif Ali Zardari chaired discussions in Islamabad yesterday to prepare for a meeting of the “Friends of Pakistan” group to be held in the United Arab Emirates next month. The group, whose members includes the U.S., U.K., China and Saudi Arabia, was established last month to help Pakistan “meet domestic and global challenges,” the state-run Associated Press of Pakistan reported.

“There’s no hiding the fact we’re in a precarious situation,” said Atif Bajwa, president of MCB Bank Ltd., Pakistan’s biggest lender by market value. “We’re quite optimistic that an inflow of funds will come through in good time to prevent default.”

The U.S. has helped Pakistan financially for its support in the global war against terrorism, providing $10 billion in funds and canceling more that $1 billion of loans. The Bush administration has urged Pakistan to do more to fight al-Qaeda and Taliban militants in its tribal areas, which the U.S. says the militants are using to regroup and attack the coalition forces in Afghanistan.

Unpopular Decision

Pakistan faces the politically unpopular decision to seek an IMF bailout after China rebuffed its neighbor’s request for cash, the New York Times reported Oct. 18. The U.S. and other nations are preoccupied with the financial crisis, and Saudi Arabia, a traditional ally, refused to offer oil concessions, the newspaper said.

At the end of the meeting in Dubai, the IMF should have a “firm idea of how much they need, who else is in the picture, and then it will be worked out what the IMF can do,” said Khan.

Pakistan’s economy has “deteriorated significantly” and growth may slow to a six-year low, the IMF said separately in a report released in Dubai yesterday.

Growth is expected to weaken to 3.5 percent in the year to June 30 from 5.8 percent last year, the IMF said. The government estimates an expansion of 5.5 percent this year.

Pakistan’s first civilian government since 1999 is facing economic turmoil after the rupee plunged to an all-time low, the current account deficit widened to a record, and inflation jumped to a 30-year high. The crisis mounted after the Pakistan Peoples Party-led government was paralyzed for almost six months because of political wrangling.

Credit Rating

Standard & Poor’s, doubting Pakistan’s ability to repay debt, cut the long-term foreign-currency rating on Oct. 6 to seven levels below investment grade, and said it may lower it again. Moody’s Investors Service lowered its credit outlook to negative on Sept. 23, citing a risk of “missed repayments.”

Pakistan has said it has almost removed subsidies on fuel by raising domestic fuel prices six times between April and July in line with global crude costs. Subsidies on electricity are due to be removed by June 2009.

“The most difficult measures that the government has had to take have been the elimination of subsidies and the commitment to zero net borrowing from the central bank,” Khan said yesterday. “My guess would be that the other conditions that would be attached to any loan would be relatively minor compared to these.”

Credit-default swaps on Pakistan’s $2.7 billion of dollar- denominated bonds outstanding have more than tripled since August to 2,470.5 basis points, according to CMA Datavision. That means it costs $2.47 million annually to protect $10 million of the country’s debt from default for five years.

Pakistan’s next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note.

“A default is not on the cards,” said Khan. “A balance of payments crisis is much closer. Some people are saying they are already there; others say they are very close to being there.”

To contact the reporters on this story: Matthew Brown in Dubai at mbrown42@bloomberg.netKhalid Qayum in Singapore at kqayum@bloomberg.net.

Last Updated: October 21, 2008 01:26 EDT

http://www.bloomberg.com/apps/news?pid=20601068&sid=aNuI0n5QIrXM&refer=economy

• OCTOBER 20, 2008, 7:00 P.M. ET

Strauss-Kahn Apologizes to IMF Staff Over ‘Incident’

 

Maxppp/Landov

Dominique Strauss-Kahn, managing director of the IMF, in Paris on Oct. 6.

WASHINGTON — International Monetary Fund Chief Dominique Strauss-Kahn apologized to the fund’s staff for what he called “an incident concerning me and a staff member,” referring to an affair he had with a former member of the IMF’s Africa division, Piroska Nagy.

That relationship is being investigated by an outside law firm, Morgan, Lewis and Bockius, to see whether Mr. Strauss-Kahn’s actions constituted an abuse of power.

A. Shakour Shaalan, the longest serving member of the IMF’s governing board, said he expects the outside law firm retained by the IMF to complete its investigation into Mr. Strauss-Kahn by the end of the month. He said that the board met with Mr. Strauss-Kahn today. (Read Mr. Shaalan’s statement.)

More

• Statement: IMF Board Dean Expects Report by End of Month
• Law Blog: The Lawyers in the Probe
• IMF Probes Chief Over Tie to Worker
  10/18/08
• Strauss-Kahn’s Road to IMF Chief
  10/18/08

“Many of you will feel that I have let you down, and I understand those feelings,” Mr. Strauss-Kahn said in an email message to staff Monday. But he added: “While this incident constituted an error of judgment on my part, for which I take full responsibility, I firmly believe that I have not abused my position.”

Ms. Nagy resigned from the IMF in August, then joined the European Bank for Reconstruction and Development. Among issues investigators are looking into is whether Ms. Nagy’s severance package was inordinate.

The probe comes 15 months after the president of the World Bank, Paul Wolfowitz, resigned under pressure because of alleged favoritism toward a World Bank employee with whom he had a longstanding relationship.

The current probe is intensifying as the IMF is trying to focus its energies on helping developing countries withstand the global financial crisis.

The Times of London

Piroska Nagy leaving her home.

The probe was sought by Mr. Shaalan, who represents Egypt and other Arab countries. Not all 24 members of the board had been made aware of the allegations and the investigation until Friday, after The Wall Street Journal made inquiries. Some internal critics charge that the members who had knowledge of the allegations could have been in a position to use that information as leverage in policy and funding disputes with Mr. Strauss-Kahn. An IMF official has said it was necessary to limit the number of people who knew about the investigation to protect privacy.

In the email, which Mr. Strauss-Kahn sent after meeting with the IMF’s governing board, he said Ms. Nagy is “a talented economist and consummate professional” and that “I can only urge that, especially given the ongoing financial crisis, we all retain our focus on the work of the Fund and the critical role we must play in helping our membership at this time. I also appeal to you to wait for the full facts to emerge and not be distracted by speculation and rumors in the coming days.”

Mr. Strauss-Kahn, a 59-year-old former French finance minister, is regarded as one of Europe’s most accomplished economic policy makers. The IMF provides economic advice and sometimes loans to its 185 member countries.

Text of Strauss-Kahn message:

Colleagues:

As you may already know, the Executive Board is undertaking an enquiry into an incident concerning me and a staff member who has since left the Fund. As a matter of good governance, the Board has retained an outside counsel to conduct this inquiry, with whom I have cooperated and am continuing to cooperate. The outside counsel is expected to report to the Board by the end of this month and I am urging that the outcome be made known to staff as soon as possible.

This morning I met with the Board and I would like to repeat to you what I told the Executive Directors. First, I apologized and said that I very much regret this incident. Second, while this incident constituted an error of judgment on my part, for which I take full responsibility, I firmly believe that I have not abused my position. Third, I fully support the process that is underway and I will, of course, follow the Board’s guidance as to how best to resolve this matter.

I want to apologize to the staff member concerned for my error in initiating this relationship. She is a talented economist and consummate professional. I acknowledge and regret the difficult situation this has created for her. I also apologize to my wife and family.

Many of you will feel that I have let you down, and I understand those feelings. I can only urge that, especially given the ongoing financial crisis, we all retain our focus on the work of the Fund and the critical role we must play in helping our membership at this time. I also appeal to you to wait for the full facts to emerge and not be distracted by speculation and rumors in the coming days. I am committed to doing what is right for the institution and it is my fervent wish that this matter be resolved as quickly as possible. I also intend to meet with you soon.

Dominique Strauss-Kahn

Write to Bob Davis at bob.davis@wsj.com

http://online.wsj.com/article/SB122451963842350545.html

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• OCTOBER 21, 2008

IMF Investigates Intern’s Appointment

By BOB DAVIS and DAVID GAUTHIER-VILLARS

WASHINGTON — The International Monetary Fund is looking at whether its chief, Dominique Strauss-Kahn, influenced the appointment of a 26-year-old political protégé to a sought-after internship in the IMF’s research department.

The managing director’s connection with Emilie Byhet was a focus of discussions this summer among a handful of IMF board members, who were fielding complaints from staffers about arbitrary personnel decisions. At the time, the staff was being reduced by about 500 slots. An IMF spokesman said that “there is no evidence of favoritism in this case,” in which Mr. Strauss-Kahn’s office recommended Ms. Byhet for the slot.

Associated Press

International Monetary Fund Managing Director Dominique Strauss-Kahn, center, at IMF headquarters in Washington on Oct. 13. Prominent French politicians have lined up to support him amid an abuse-of-power probe.

The board members decided against bringing the issue before the whole board, or intervening more broadly, individuals familiar with the deliberations said. Instead, they referred the matter to the legal department, which didn’t take further action.

Ms. Byhet’s internship ended in August. A man who said his name was Mr. Byhet, in Ms. Byhet’s hometown of Normandy, declined to take a message for Emilie. A spokesman for Mr. Strauss-Kahn said Ms. Byhet and her parents are friends of Mr. Strauss-Kahn and his wife.

The episode is being re-examined as part of a larger look at Mr. Strauss-Kahn’s personal behavior at the IMF. The IMF has retained the firm of Morgan, Lewis & Bockius LLP to investigate whether Mr. Strauss-Kahn abused his position in connection with a sexual relationship he had with a subordinate, Piroska Nagy, at the time a senior official in the IMF’s Africa department. To determine whether Mr. Strauss-Kahn abused his power, the probe is looking at a wide variety of topics.

On Monday, Mr. Strauss-Kahn sent an email to the staff apologizing “for my error in initiating this relationship.” Though he didn’t cite Ms. Nagy by name, he called her a “talented economist and consummate professional.” He said he had apologized to his wife and family.

Over the weekend, Anne Sinclair, the wife of Mr. Strauss-Kahn, said on her blog that she and her husband were expecting the outcome of the IMF investigation “calmly and dispassionately.” Ms. Sinclair, a prominent French TV journalist, said that the “one-night affair” was behind them and that “we love each other as much as on the day we met.”

Mr. Strauss-Kahn said that the incident “constituted an error of judgment on my part, for which I take full responsibility.” But he said, “I firmly believe that I have not abused my position.”

Prominent French politicians have lined up behind Mr. Strauss-Kahn. Jean-Claude Trichet, the French president of the European Central Bank, said in a Sunday radio interview he was convinced that Mr. Strauss-Kahn would be cleared of allegations that he abused his position. Luc Chatel, a French government spokesman, also offered support in a radio interview.

The allegations against Mr. Strauss-Kahn are a major distraction for the IMF, which is trying to show that it can play a central role in restructuring financial institutions to avoid a replay of the current global financial crisis. The Byhet matter could complicate its efforts to maintain that focus.

Times of London

Piroska Nagy, the IMF staffer with whom the fund’s chief, Dominique Strauss-Kahn, had an affair.

In the summer of 2005, Ms. Byhet joined the campaign team of Mr. Strauss-Kahn, who was seeking the Socialist nomination for the 2007 presidential election. According to two people who worked on the team, Ms. Byhet was often seen at La Planche (The Plank), the nickname of Mr. Strauss-Kahn’s campaign building.

“She attended all his political meetings,” a former college mate of Ms. Byhet at the Institute for Political Studies said. “She admired Mr. Strauss-Kahn and seriously believed he had his chance.”

But Mr. Strauss-Kahn, 59, wasn’t nominated, and in September 2007 he became IMF chief. Ms. Byhet was awarded an internship in February 2008. According to three individuals familiar with the process, the IMF human resources department usually sends a list of around 10 candidates for departments to choose from.

In this instance, a human resources manager in mid-January sent over Ms. Byhet’s name alone. “I would very much appreciate your assistance in assigning her” as an intern, the manager wrote to the research department. Two individuals say that an HR manager also called the research department to say that “management,” which in IMF lingo usually means the IMF managing director, favored the appointment.

The IMF spokesman added that “there is no evidence of any direct involvement” in the process by Mr. Strauss-Kahn. However, he noted “that it is accurate to say her name was forwarded to our Human Resources department by the Managing Director’s office.” He called that “routine practice.”

While research interns are usually Ph.D. candidates in economics, Ms. Byhet had a master’s degree in public policy and communications. She listed her first “professional experience” as an “internship with the campaign team of Mr. Dominique Strauss-Kahn.”

The research department decided to accept the candidacy, in part to accommodate what they saw as a request by Mr. Strauss-Kahn. Her internship was scheduled to last from Feb. 1 to April 30, but was extended through August after she got ill in the middle of her program.

An IMF spokesman said that “standard IMF procedures” were followed in the case. Winter internships often have fewer candidates, the spokesman said, adding that the minimum standard for the position is a master’s degree. According to her resume, Ms. Byhet did her undergraduate work at the Sorbonne University, where she studied economic history, and got a master’s in public policy at the Institute for Political Studies.

Write to Bob Davis at bob.davis@wsj.com and David Gauthier-Villars at David.Gauthier-Villars@wsj.com

http://online.wsj.com/article/SB122454066324851771.html