The International Monetary Fund must turn its attention to the challenges created by the emergence of sovereign wealth funds, hedge funds and private equity funds as powerful players in the global financial system, Dominique Strauss-Kahn, its new managing director, said on Friday.
On his second day as IMF chief, Mr Strauss-Kahn said the rise of these new players was a very important development.
“The evolution of the financial world and financial globalisation implies that what the fund is doing has also to change,” he said, adding that in the new world of global finance, “financial instability may come from other sources rather than external imbalances”.
Mr Strauss-Kahn, a French Socialist and former finance minister, said many of the IMF’s shareholder governments were asking it to develop “deeper insight into sovereign wealth funds” in particular.
He said the IMF analysis should seek to distinguish among different types of sovereign funds – presumably based on transparency, investment objectives and other criteria.
“They should not all be put in the same box,” he said.
He confirmed that the IMF would also seek to develop “some level of guidelines” setting out best practice for sovereign funds.
Many policymakers in the US and Europe are wary about allowing politically controlled sovereign funds free rein to acquire strategic assets. The US Treasury, which emphasises that it welcomes investment from these funds, worries that they could trigger a protectionist backlash in Congress.
On the dollar, Mr Strauss-Kahn reiterated the IMF opinion that the currency was overvalued on a medium-term view, and said it was not surprising to see the it declining.
He said the euro was “in line” with fund estimates of its medium term equilibrium value, and the fund did not expect it to rise or fall in value.
Mr Strauss-Kahn promised to take steps to boost the influence of developing countries within the IMF in a bid to shore up its legitimacy.
He said it was important to complete the “quota” or shareholding reform process begun by his predecessor, Rodrigo Rato, but warned that it “won’t change the world”.
To give developing countries greater voice within the IMF would entail considering further steps, for instance double-majority voting on some issues, Mr Strauss-Kahn said.
He said it would be necessary to conduct a “review of the priorities of the fund” in the light of demands from the Group of Seven leading industrialised nations that it should aim to cut spending by 10 per cent on top of existing planned reductions.
Some have speculated that the IMF may pull back on its work in the poorest countries, leaving them to the World Bank.
However, Mr Strauss-Kahn rejected that idea out of hand, saying the IMF should focus on helping to ensure short-term economic stability in poor countries, with the World Bank focusing on longer term structural reform.
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