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Thursday, April 22, 1999 Published at 10:53 GMT 11:53 UK

Business: The Economy

US calls for limits on IMF aid

Robert Rubin wants to reform IMF policies

The US government has proposed a major policy shift in the role of the International Monetary Fund (IMF), the world organisation which is supposed to deal with financial crises.

US Treasury Secretary Robert Rubin says the IMF should no longer try and help countries defend fixed exchange rates.

The global financial crisis that struck Russia and Brazil last year led to the IMF pouring in billions of dollars in a fruitless attempt to defend their currencies' fixed link to the dollar.

"As a matter of policy, we believe that the international community should not provide exceptional large scale finance to countries intervening heavily to defend an exchange rate peg," Mr Rubin said.

The United States has a strong influence on what the IMF can do, with a blocking veto on any new lending due to the size of its shareholding.

As a result of the crisis, the IMF is introducing a Contingent Credit Facility, to lend money to countries before financial panic strikes.

New financial architecture

Mr Rubin's remarks are part of an effort by world leaders to redefine the shape of the world financial system following the global collapse last autumn.

The current crisis had its origins in private sector lending to developing countries, and Mr Rubin made it clear that the public institutions would not necessarily bail out the private lenders.

He indicated, in another break with precedent, that the IMF should be prepared to agree an aid package even if a country was in default with its private creditors.

"When a country is implementing a strong programme of policy reform, the door to official finance should be kept open even if cooperative efforts to clear outstanding arrears with private creditors have yet to be concluded," he said.

Mr Rubin said he could endorse the efforts of countries to limit foreign borrowing, especially by their banking sector, but that long-term controls on capital would be counter-productive or unenforceable.

Close watch on hedge funds

The US is also concerned on reducing risk in the financial sector caused by excessive leverage, which it believes contributed to the massive capital flows in and out of developing countries.

"The near-collapse of Long Term Capital Management highlighted the possibility that excessive leverage in one financial institution could increase the likelihood of a general breakdown in financial markets," Mr Rubin said.

LTCM had to be rescued by a consortium of banks and brokerage firms who put up $22bn in September last year to save the firm.

The US will be pressing for tighter control over bank lending, including clearer risk categories and increases in the amount of capital reserves banks need to hold.

It also wants to tighten up controls on off-shore banking centres.

UK calls for 'bail-in's

UK Chancellor Gordon Brown has gone further in calling for private-public collaboration before any future IMF rescues take place.

He said that before the IMF uses its own resources in a crisis, it should be certain that there will be an appropriate contribution from the private sector in debt roll-overs and new credit.

The international banking community is strongly opposed to such 'bail-ins' which it believes will strongly discourage lending to riskier markets.

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