Financial Chill May Hit Developing Countries

The New York Times
By MARK LANDLER
Published: September 25, 2008
WASHINGTON — As Europe and Asia play down the need for an American-style bailout for their banks, the crisis may threaten a different class of countries: those in Eastern Europe, Latin America and Africa that depend on foreign capital and shoulder American-style trade deficits.
Alarmed by the threat, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, is calling for a multilateral consultation — involving the United States, Europe, China and other financial powers — to develop a coordinated response to the crisis.
“We’re facing a systemic crisis, and it needs a systemic response,” Mr. Strauss-Kahn said in an interview on Wednesday. “The I.M.F. is the right place to organize a global response to weaknesses in the global financial system.”
His initiative is an attempt to thrust the fund back into the thick of world events — a role it played in previous financial crises in Asia, Russia and Latin America, but has not played in the current turmoil.
Whether or not he succeeds, economists agree that Mr. Strauss-Kahn, a former French finance minister, has identified a risk. The crisis, by squeezing the flow of capital, threatens countries from the Baltic to Africa that depend on foreign money to finance their deficits.
“There are a number of countries where you can get quite worried if capital flows stop,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “When you look at their high current-account deficits, Central and Eastern Europe seem particularly vulnerable.”
A second category of countries are those who export oil or other commodities, and are vulnerable to a decline in prices — something that economists said would happen if the crisis hobbled growth. Oil plunged last week as Wall Street teetered, but it bounced back as hope rose for a bailout.
“If the world economy does experience something like a global recession next year, those countries will be at risk,” said Michael Mussa, a senior fellow at the Peterson Institute for International Economics.
There are more than 20 countries with current-account deficits that exceed 5 percent of their economic output, Mr. Strauss-Kahn said, putting them in what the fund considers the endangered category.
Mr. Strauss-Kahn declined to name names, but outside economists listed Bulgaria, Estonia, Romania and Turkey as among the red flags in Europe. In Africa, they said, South Africa and Nigeria were worrisome; and in Latin America, Venezuela and Ecuador.
The list, Mr. Strauss-Kahn said, does not include the four largest emerging-market countries — China, Russia, Brazil and India — which are running healthy trade surpluses or have hundreds of billions in foreign exchange reserves, though Russia is vulnerable to a drop in oil prices.
Western Europe, economists say, is unlikely to be seriously affected, despite having banks that hold mortgage-related assets. This has made European officials reluctant to heed the Treasury Department’s call for them to undertake their own efforts to bolster the financial system.
Treasury Secretary Henry M. Paulson Jr. has resisted efforts by Congress to make foreign banks ineligible for the plan. But administration officials said they planned to set priorities on which ones to help, based on whether their governments were willing to help with the cleanup process.
Two of the most threatened countries lie on Europe’s eastern frontier: Bulgaria and Romania, which have racked up high current account deficits and are running overheated economies.
“These countries have been growing too fast or borrowing too much,” said Peter Akos Bod, a former president of the Hungarian central bank. “Should there be a sudden stop in capital, they would be in deep trouble.”
Latin America is a perennial source of worry, given its history of troubled fiscal policy. For the moment, several countries, notably Venezuela, are benefiting from the soaring price of oil.
But if oil and other commodities were to decline, said John Williamson, a senior fellow at the Peterson Institute who specializes in the region, “South America would be less comfortably placed.”
Mr. Strauss-Kahn said he recognized that the monetary fund would be largely a bystander in this crisis, given that the problems began in the United States and remain largely a domestic banking issue.
But he said the fund could play a role in giving advice. Among its suggestions: rather than buy distressed mortgage-related securities from banks, the Treasury should swap them for bonds, which Mr. Strauss-Kahn said would be cheaper and leave some of the risk with the banks.
Mr. Strauss-Kahn said he also planned to confront one of the most politically charged issues at the fund: strengthening its pressure on China to allow its currency, the renminbi, to rise.
Critics in the Bush administration and Congress say the fund has not pushed China hard enough on its currency. Mr. Strauss-Kahn acknowledged the difficulty of being tougher, given the politics of the fund.
The fund’s last multilateral consultation, to discuss global imbalances, was held in 2006. It included China, Japan, the European Union, Saudi Arabia, and the United States. Mr. Strauss-Kahn did not say which countries would be invited to take part this time, though other officials said it would probably include those countries and emerging markets like Brazil and Russia.