PARIS (Dow Jones)--An updated report commissioned by French President Nicolas Sarkozy will recommend that the Group of 20 industrialized economies undergo a major structural overhaul while also expanding the powers of the International Monetary Fund to deal more effectively with future financial crises, according to one of the report's authors.
France, which this year holds the G20's rotating presidency, has made reforming the international monetary system, curbing the volatility of commodities prices and improving global governance its top priorities.
The experts who authored the report include former IMF managing directors Michel Camdessus and Hoerst Koehler as well as former U.S. Federal Reserve Chairman Paul Volcker. They will present their proposals to French Finance Minister Christine Lagarde in advance of the Feb. 18-19 meeting of G-20 finance ministers.
The set of recommendations will expand on a previous report presented to Sarkozy two weeks ago.
In addition to proposals floated earlier by the French presidency, the report will also suggest making sweeping changes to G-20 governance to bring it more in line with the way the IMF operates.
The G-20 would organize itself along the lines of constituencies, in which each member sitting around the table would represent a group of neighboring countries--a framework mirroring that of the International Monetary and Financial Committee, which acts as a steering committee for the IMF, and that of the IMF's board.
Camdessus told Dow Jones Newswires that this would help make the G-20 more legitimate by giving all 187 IMF members a voice at the G-20, and as such make it more efficient in preventing future crises. "It means each of the 20 countries around the table would have a mandate to represent others," Camdessus said in an interview. "The entire world would be associated to the [G-20's] decisions."
Among the main proposals in the reworked report, as revealed to Dow Jones Newswires, is the creation of a currency system that depends less on the U.S. dollar and more on other currencies such as the Chinese yuan and on alternative reserve currencies like the IMF's Special Drawing Right, or SDR. The French government has already put forth strong signals that it supports such ideas.
Other highlights include strengthening crisis-management mechanisms to prevent countries from accumulating excessive foreign-exchange reserves, which fuel currency volatility, as well as drafting common rules to help nations cope with unexpected surges of capital inflows, which put upward pressure on their currencies.
The report also recommends turning the IMFC into a college of finance ministers with actual decision-making power instead of its current advisory role to the IMF board.
Speaking to reporters at the European American Press Club in Paris Thursday, Lagarde said bringing the structure of the G-20 more in line with that of the IMFC was an option worth exploring.
Some observers, however, objected, saying the process is likely to be fraught with difficulties and to fuel infighting between countries. The largest IMF board members--the U.S., Japan, Germany, France and the U.K.--have seats of their own and would have to learn how to share power, one IMF insider said.
Though the IMF's powers and resources have been expanded considerably during the financial crisis, the authors of the report stressed that most solutions had been cobbled together on an ad-hoc basis and they recommended some of them be made permanent.
In particular, they said, the role of the IMF as a lender of last resort has to be recognized, so it is equipped to deal with systemic crises. Central banks, which have been supplying banks with unlimited liquidity and have massively expanded their balance sheets through government bond-buying programs during the crisis, couldn't be expected to respond in the same way should another financial storm occur.
The Fed, for instance, provided emergency swap lines to South Korea, Mexico and Brazil to keep liquidity flowing to these countries at the height of the financial crisis.
"The Fed has done a good emergency job with its swap deals. Could it do it again in a new crisis? It's open to question. It would be useful to design a more permanent multilateral solution," Camdessus said. "The role of the IMF as a lender of last resort would need to be recognized and it should be given the means and the resources to do it, including regular and massive SDR allocations in the event of a crisis."
Camdessus said formalizing the IMF's role as lender of last resort also involves closer cooperation between the IMF and the Bank for International Settlements--which provides banking services to central banks and international organizations--in managing global liquidity.
The report also advocates giving the IMF sanction powers against countries that flout internationally agreed rules. The IMF has long been criticized for its lack of actual enforcement powers, which has sometimes stood in the way of making its policy recommendations heard by the more powerful IMF members.
Besides public reports on the policies of erring countries, sanctions could go as far as freezing members' voting rights or activating trade sanctions through the World Trade Organization at the IMF's request, Camdessus said.
Source: http://online.wsj.com
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