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Friday, July 29, 2011

Applause for Lagarde's IMF debut

Emerging markets are increasingly losing faith in the International Monetary Fund due to its overtly European focus and questionable handling of the ongoing sovereign debt crisis, Ashmore’s head of research Jerome Booth has said.

Speaking to Citywire Global, Booth said that growing disillusionment among managers of emerging market funds was valid given the IMF’s recent activity.

Most notably, the IMF has agreed to pledge €78.5 billion to Greece, Ireland and Portugal through to 2014 and, earlier this month, it was also involved in thrashing out the €109 billion rescue package for Greece.

Although it has not stated how much it intends to contribute to the second Greek bailout.

Commenting on its involvement, Booth said: ‘The IMF risks its credibility by putting more money into Greece and arguably it should not have participated anyway in the existing bailout programme. The criticism is that it is now throwing good money after bad and I think that is an extremely valid concern.

Political nature of the current U.S. debt crisis may serve as a global economic harbinger.

“Given the current political situation within the U.S. with respect to spending cuts and tax rises, it would not be unreasonable to question future political appetite for future contributions to the IMF,” said Michael Hewson, market analyst with Britain’s CMC markets, in a report.

In Britain, there was consternation among some groups in June when they discovered the government had allowed a £9-billion ($13.9-billion) increase in IMF contributions. This may be a sign of fights to come, Mr. Hewson said.

He added that with these new fiscal realities and possible future contention, it’s necessary to reconsider the future of IMF funding, especially because its services will likely remain necessary in Europe for “quite some time to come.”

It could also lead to “a dilution of U.S. power and influence,” Mr. Hewson said.

Emerging market economies recently stood in opposition to the unwritten rule that European and U.S. governments choose the head of the IMF and World Bank, respectively. The recent appointment of Christine Lagarde as head of the IMF was approved with assurances that she would make the appointment more merit based.

According to Mr. Hewson, these same countries have demonstrated disquiet over the IMF’s special treatment of Europe’s debt crisis in contrast to how it has dealt with bailouts in the past. A political shift of this nature could make future bailout deals that much more onerous and conditional as the balance of power shifts to traditionally overlooked countries with the fiscal means to prop up the fund.

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