Strauss-Kahn: Searching options

Washington, April 8 (Reuters): The International Monetary Fund (IMF) has agreed to put its finances on a sound footing by selling some of its gold and investing the profits in government and corporate bonds, and possibly equities.

IMF managing director Dominique Strauss-Kahn described the agreement to overhaul the IMF’s 62-year-old financial mechanism as “a landmark decision”.

Until now, the IMF, which played a central role in bailing out countries in Asia and Latin America in the 1990s, relied on lending to countries to fund its operations. But with fewer crises over the past few years, the IMF has lost income and is faced with a growing income deficit.

“We have made difficult but necessary choices to close the projected income shortfall and put the fund’s finances on a sustainable base, but in the end it will make the fund more focused, efficient and cost effective in serving the needs of our members,” Strauss-Kahn said in a statement.

Under the proposal, still to be approved by the IMF’s 185 member countries, an endowment will be created with the sale of 403.3 tonnes of the fund’s 3,217 tonnes of gold stocks, an IMF official said.

The approval of the US Congress will be needed before any gold sale could begin. An IMF official said the gold would be sold on the market or offered to central banks to be acquired at market prices. The sales will be coordinated under an existing European central bank gold agreement, which allows for the sale of about 500 tonnes of gold a year.

Emerging markets

The IMF has warned emerging markets, which have so far weathered the ongoing financial crisis, that they may not be completely insulated while noting that the risks to India’s financial sector appeared manageable.

According to the IMF’s global financial stability report, unlike past financial crises, emerging markets have remained relatively resilient, supported by solid fundamentals, prudent macroeconomic policies, and financial cushions built up over recent years.

“However, we have raised our assessment of emerging market risks as the market turmoil has exacerbated vulnerabilities in a number of emerging economies that relied excessively on foreign bank credit or wholesale funding to finance rapid domestic credit expansion,” the report added.

“In India, some corporations have borrowed dollars and swapped the resulting debt into yen, increasing the difference between borrowing and lending rates, but leaving a large open exposure. Nevertheless, the risk to the Indian financial sector arising from these transactions currently appears manageable,” the IMF said.