Friday, October 03, 2008

IMF’s Dominique Strauss-Kahn Tells Europe to Wake Up and Smell the Credit Crisis

Sources: Spiegel Online International, “Gathering Storm: IMF Urges Europe to Develop Credit Crisis Strategy”; Business Week, "IMF Urges an EU Credit Crisis Strategy"

IMF chief Dominique Strauss-Kahn has announced that it is high time for Europe to develop a plan to react to the credit crisis. According to Strauss-Kahn, Europe has not been quick to react to the credit crisis’ latest developments due to a misperception that the credit crisis is primarily an American problem. The credit crisis is, however, a global phenomenon, and Strauss-Kahn insists that European countries should be devising and implementing a plan to respond to the crisis uniformly.

The European Union’s president, Nicolas Sarkozy, has stated that he would like to discuss a reaction plan to the credit crisis in mid-October. The primary issues European banks are dealing with are the rising interest rates for interbank loans and the unavailability of short-term credit. Though the EU has yet to formulate a plan to react to the crisis, individual countries have for some time been taking over millions of Euros worth of shaky loans from their own banks. In an unprecedented move, Ireland has recently guaranteed all deposits in Irish banks. The decision, worth approximately $566 billion, has apparently been successful in calming nervous investors and has saved Ireland from further stock plunges.

Strauss-Kahn has also hinted at the possibility that the IMF will play a much more proactive role as international regulator than it has played thus far since the onset of the credit crisis. He has said that the international community needs a “global guarantor” to monitor global finance standards. In his view, regional entities like the European Union are not properly equipped to respond to the current credit crisis.

Strauss-Kahn has also criticized the United States for its delay in passing a bailout plan. His comment that “a non-perfect plan is better than no plan at all” not only indicates that he is impatient at the speed with which the United States has responded to the crisis, but suggests that if Europe does not react promptly, the IMF will take on a much more proactive role as an international regulator.

Discussion Questions:

1- Strauss-Kahn is calling for a uniform European reaction to the credit crisis. What would be the nature of this uniform reaction? How would it be similar to, and different from, the reaction that the United States is planning to take?

2- The EU plans to meet in mid-October to discuss potential plans to react to the credit crisis. Is waiting until mid-October wise? Given the speed with which the credit crisis’ developments are taking place, should President Sarkozy consider calling for an earlier meeting?

3- Strauss-Kahn’s latest declarations regarding the credit crisis suggest that the IMF may take on the role of “global guarantor.” Is this a role that the IMF is prepared to take on? How would other countries react to the IMF’s new role as an international regulator?

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