IMF head predicts no more bank collapses

Thursday 09 October 2008

Dominique Strauss-Kahn, the head of the IMF, told France 24 that he predicts further losses for banks in Europe, but no major collapses. And he said the IMF suggested the US adopt a Paulson-style plan months ago.

Dominique Strauss-Kahn, general director of the International Monetary Fund (IMF) said Thursday that the financial crisis had worsened but that he didn’t think that Europe would see the kind of bankruptcies that the US experienced with Lehman Brothers. “European banks don’t just do investments. They are universal. They will suffer losses but they won’t fall completely.”

As far as crisis management goes, DSK insists on the importance of the IMF as an adviser to governments. He says the IMF suggested to the US government months ago that they buy up the banks' bad debt and take partial ownership as a way to help the banks recapitalize - the essence of the recently adopted bailout proposed by Treasury Secretary Henry Paulson. “We suggested that Americans enforce the Paulson Plan,” he says. “They were long to react but they ended up doing it.”

The IMF intervention in the current crisis is different from what it did during the Argentina crisis because “those crises were monetary crises whereas what we’re facing today is a banking crisis, i.e. they didn’t fall completely under the IMF mandate. But we did advise governments back then to recapitalize banks.”

“I activated the IMF emergency procedures,” DSK explains. “The crisis is not restricted to the countries where it originally started but it is spreading throughout the world. Countries can’t find cash.”

Echoing comments he made during a press conference earlier in the day, DSK urges European countries to better coordinate their policies. “On a human level, we understand that Europeans want to act separately,” he says. “But look at Ireland; it created a backdraft, which led to a flux of capital. It’s very destabilizing.”

About central banks’ intervention, “it’s good that they acted in a concerted manner but it’s only one element in the answer,” says DSK. “We need other elements. Today, everything is frozen. We need to unfreeze the situation. ”

DSK supports British Prime Minister Gordon Brown’s proposition to guarantee interbank loans. “It’s revolutionary,” he says. “It is crucial that the lender put trust again in the borrower.”

DSK will attend in the G7 meeting scheduled for Friday. He intends to raise there the central issue of coordination. He will also contribute elements of discussion on economic policies. “I am skeptical as to their efficiency as long as we haven’t found trust.”

Addressing again the importance of the Paulson Plan and of bank rescue plans, he stresses that “in many cases, they have been good for taxpayers. In Scandinavian countries, it even raised profits. If it’s done well, it can work.”

DSK hopes that the world can draw lessons from the crisis. Calling for a new Bretton Woods seems excessive to him because western countries are not starting from zero like they did after WWII. “We need to act so that the crisis will not be forgotten once it’s over,” he says. “We need to reorganize the system. Institutions need to adjust to globalisation today. "