The developing countries, with Brazil and India in the vanguard, defied an attempt by the G7 to impose a solution on an issue which has been plaguing international financial diplomacy for years - the creation through the IMF of new foreign exchange reserves for its members. This arcane proposal has been described by a United States Treasury official as providing a 'global overdraft facility.' It allows countries to borrow dollars and other currencies to help tide them over short-term balance of payments difficulties.
The row blew up in an eight- hour meeting of the IMF's key 'interim' committee on Sunday. It was fuelled on several levels, by personal differences, by fundamental disagreements over the role of the IMF in the international financial system and by rivalry between the world's rich and poor countries.
As the dust settled yesterday, The row also appears to have left in some doubt the long term future of the IMF's managing director, Michel Camdessus, who was governor of the Bank of France for three years before he took the IMF helm in 1987. He has an impeccable background from the University of Paris and the National School of Administration, and is renowned for responding to even the most hostile questions with exquisite politesse.
British Treasury officials said there was little point trying to resolve the issue of foreign exchange reserves for some time, as the opposing positions appeared irreconcilable. However, they added that Mr Camdessus should stay in his job, as he had proved a successful managing director.
He had for some time been proposing to issue pounds 34bn of new foreign exchange reserves to IMF members, in proportion to their shareholdings (or 'quotas') in the fund. These reserves would have taken the form of 'special drawing rights', the IMF's artificial but internationally accepted money which can be cashed in by central banks. Mr Camdessus said this would help meet a need for pounds 375bn of new liquidity in the world economy over the next five years as international trade volumes continue to grow. But Hans Tietmeyer, president of the Bundesbank, made it clear that Mr Camdessus' plan took unacceptable risks with inflation. Germany wanted SDRs issued only to countries that had joined the IMF since they were last issued in 1981 - including Russia and the other former Communist countries making the transition to free market systems.
Kenneth Clarke, the Chancellor of the Exchequer, and Lloyd Bentsen, the US Treasury Secretary, came up with a compromise. This would have boosted world foreign exchange reserves by pounds 15bn, but under a formula which would have seen nearly half the SDRs go to developing and former Communist countries. The G7 finance ministers backed the plan unanimously at a meeting on Saturday, although Edmond Alphadery, the French Finance Minister, abandoned Mr Camdessus's side only with great reluctance.
But before the G7 took its proposal to the interim committee, Mr Camdessus successfully assembled a blocking coalition to the Anglo-American proposals from the Group of 24 developing countries. He told them that the G7 proposal was too small and would take too long to put into effect, because by failing to treat all countries in the same way, it would require parliamentary ratification.
The developing countries remained solid in their opposition to the G7 plan. They also attempted to use a proposed extension to the IMF's 'transformation facility', which provides money to help former Communist countries set up free market systems, as a bargaining chip. This was voted down as well, although almost no country objected to the scheme. The only significant proposal which the IMF got support for was an increase in 'access limits', the amount countries can borrow from the fund as a percentage of their share holdings in it.Reuse content