IMF urges joint intervention to prop up euro : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

IMF urges joint intervention to prop up euro By George Trefgarne in Prague

September 20, 2000

THE International Monetary Fund, the body responsible for managing crises in the world economy, called yesterday for joint intervention to prop up the euro as the single currency was hit by a fresh wave of selling on both sides of the Atlantic.

The euro, which dipped below 85 cents just before the IMF's demand, recovered slightly to close marginally higher in London at 85.36 cents. However, the currency again came under pressure in after-hours trading and plunged back below 85 cents in New York last night to 84.77 cents.

It has now lost more than 27pc of its value since launching at $1.17 just over 18 months ago. Michael Mussa, the IMF's director of research, said: "The circumstances in which major countries can justify intervention are relatively rare but arise from time to time. You have to ask, if not now, when?

Mr Mussa said for intervention to work, it would have to be co-ordinated: "I used to say the impact of the weak euro was more of an embarrassment than a problem. Now I think it is a problem."

Mr Mussa was speaking at the unveiling of the IMF's bi-annual World Economic Outlook in Prague. Finance minister and central bankers from the G7 advanced countries will join demonstrators in converging on the Czech capital this weekend for the annual meetings of the IMF and the World Bank.

The gathering is likely to be dominated by demands to strengthen the ailing single currency. Euro weakness is setting off inflation in the euro zone as well as causing unnatural strength in other currencies. The Japanese are said to be especially concerned.

According to the World Economic Outlook, the IMF has upgraded its estimate for world growth this year by half a percent to 4.7pc, largely because of continued buoyancy in the United States. Mr Mussa said: "The world embarks on the first year of the new millennium registering the strongest growth in almost a decade."

Mr Mussa said there were two threats to this rosy scenario: the euro and the oil price. His estimates were made when oil was about $26 a barrel, and he said if it stayed at current levels his growth estimates would have to be cut by up to half a percentage point.

In the United States last night, the energy secretary, Bill Richardson warned that crude oil, which was around $38 a barrel in New York, was dangerously high and that the President, Bill Clinton, would be looking at ways to protect consumers.

However, the IMF is most concerned about the euro. The United States has a $400 billion current account deficit and the IMF fears there could be a sudden fall in the dollar and rise in the euro. It warned: "Prolonged weakness of the euro could increase the prospects of a disorderly adjustment in exchange rates."

There was also little succour from the IMF for Gordon Brown. In April, it aroused his anger by saying his rise in public spending was "regrettably pro-cyclical". His complaints have paid off as the criticism has not been repeated verbatim. However, the IMF said its British growth forecast for next year has been upgraded by 0.8pc to 2.8pc "bolstered in part by the planned expansion in government consumption'. That is the biggest upgrade for any advanced country.

The IMF still believes the Bank of England may have to raise interest rates as a result of Mr Brown's spending spree and the weakness of sterling against the dollar. When pushed on the matter, David Robinson, a former HM Treasury official now working for the IMF, said: "That, broadly speaking remains our judgement."

-- Carl Jenkins (, September 20, 2000

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