Global finance chiefs ready defenses ahead of Fed exit

Reuters

By Anna Yukhananov and Alonso Soto

WASHINGTON, Oct 12 (Reuters) - Global finance chiefs onSaturday told the IMF to stand ready to aid emerging marketeconomies that could be destabilized by a sudden flight ofcapital when the U.S. Federal Reserve and other central banksback away from ultra-loose monetary policies.

The International Monetary Fund's governing panel, after asemi-annual meeting, acknowledged the risks posed by atransition toward more normal policies in advanced economies,and it urged nations not to delay preparations.

"The key task is to focus on the transition, prepareourselves well for this eventual normalization," the committee'schairman, Singaporean Finance Minister Tharman Shanmugaratnam,told reporters. "It's not imminent, but it will happen."

A wave of selling spread quickly through world financialmarkets this year after the Fed, responding to signs of strongerU.S. growth, said it could start winding down its economicstimulus program by year end.

The pain was felt most severely in developing countries as agusher of cheap dollars that had poured into their economiesdried up, sparking a sharp slide in stock prices and currenciesand pushing up local interest rates.

Low interest rates in developed economies, engineered bytheir central banks in recent years, had spurred investors tohunt for higher-yielding assets, many of which were found inemerging markets.

When the U.S. central bank does move to reduce stimulus, therepercussions "may be even more significant," said Zeti AkhtarAziz, chief of Malaysia's central bank. Aziz said the IMF's"policy toolkit" needed to expand to help cope with the fallout.

The U.S. central bank has held interest rates near zerosince 2008 and has tripled its balance sheet to roughly $3.7trillion. Over the last year, it has been pumping $85 billioninto the U.S. financial system each month through bondpurchases.

The IMF panel, which represents the Fund's 188 membernations, said these ultra-accommodative policies have supportedworld growth and remained appropriate for now.

Worries about the strength of the U.S. economy prompted theFed to refrain from winding down its stimulus last month. Butfew doubt it will wait very long.

The panel urged developed market central banks to try tolimit the damage to emerging markets when the time comes to movetoward tighter policy, saying the shift should be "well-timed,carefully calibrated and clearly communicated."

The Fed faced criticism from officials in developing nationsand from market participants for abruptly suggesting in Junethat it could soon move to scale back its stimulus. It surprisedonlookers again last month when it opted to hold fire.

"Global financial stability is a shared responsibility,"said Ewald Nowotny, a member of the European Central Bank'sGoverning Council. "The Fed should therefore clearly communicatethe path of its intended policy actions to minimize negativespillovers" on developing economies.

'CONSIDERABLE TURBULENCE'

Russian Finance Minister Anton Siluanov said policymakersshould prepare for another round of "considerable turbulence infinancial markets" once a move toward tighter policy begins.

"The assumption that the asset price correction that beganthis summer has already been largely completed does not seem tobe plausible to us," he said, referring to the sell off inemerging markets.

To protect themselves, finance leaders urged developingnations to act now to reform their economies and reducevulnerability to unpredictable capital flows.

That's especially critical for countries where budgetdeficits make them dependent on unstable foreign capital flows.

"Fiscal consolidation remains a high priority in countrieswith large fiscal imbalances, while others should rebuildbuffers, unless growth deteriorates significantly," the panelsaid in a closing statement.

While emerging markets' pace of growth has slowed of late,the IMF governing committee said it still expects expansion inthese countries to account for "the bulk of global growth."

Advanced economies, including the United States and Japan,need to commit to medium-term deficit reduction plans whilesupporting near-term growth and job creation, it said.

The finance chiefs also called for completing IMF reforms togive emerging markets a greater say at the global lender.

Three years ago, the IMF's board agreed on changes thatwould cut Europe's representation, but they have been held upbecause the U.S. Congress has yet to sign off on them, andprospects for action before year-end are slim. Withoutratification by the United States, the fund's biggest and mostpowerful member, the reforms cannot move forward.

"The governance reforms have entered a stage of completeparalysis and this has further eroded the fund's legitimacy andcredibility," said Brazil's central bank chief, AlexandreTombini.

"Emerging market countries have honored their part of thispolitical agreement," he added. "It is time for the UnitedStates and Europe to deliver theirs."

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