IMF reform is a serious hurdle to gold sales

By Thomson Financial
via Forbes Magazine
Friday, March 7, 2008

http://www.forbes.com/markets/feeds/afx/2008/03/07/afx4747406.html

WASHINGTON -- When the Bush administration said in February that it could support the sale of a large chunk of the International Monetary Fund's gold supplies, gold prices fell a bit as investors saw the possibility of increased supply.

But several experts said this week: Don't hold your breath on IMF gold sales. There are many hurdles the IMF must clear before it gets to a position where it can start selling the proposed 12.9 million ounces of gold on the market, not the least of which is a skeptical US Congress that will want to see several IMF reforms before it approves the sale.

The IMF needs to sell a portion of its gold reserves in order to create an endowment that would be used to fund future activities, and the need is becoming desperate. The IMF is anticipated to have a $400 million budget deficit in the next few years, and is expected to cut as many as 400 employees in order to find $100 million in savings.

IMF finances are in disarray in large part because interest generated from loans have dried up as the IMF's lending activity has dropped.

Last week, the Bush administration said it could accept a proposal to fund future IMF activities through gold sales -- the sale of 12.9 million ounces would generate an estimated $10-12 billion at current prices.

But there's a catch, and it's a big one: The US is tying its support for gold sales to IMF reform.

Some of this reform involves steps that are already under way. Treasury Undersecretary for International Affairs David McCormick said last week that IMF Managing Director Dominique Strauss-Kahn is already working diligently to cut staff, and said the IMF has begun the work needed to revamp its voting structure to better reflect fast-growing emerging economies.

But he also said the IMF needs to shift its focus to three major areas. These are tougher surveillance of currency regimes of IMF members, continued work on guidelines for how sovereign wealth funds should operate around the world, and collaboration with IMF members to help avoid financial crises.

McCormick tied these objectives directly to US support for IMF gold sales.

"We recognize ... that with the fund's mission placing greater emphasis on surveillance and financial stability -- and less emphasis on lending -- the IMF will still require new sources of income," he said.

"The United States will help ensure that the IMF has adequate resources to fulfil its vital global mission by seeking authority from Congress for a limited sale of IMF gold."

Here exists a major roadblock to the sale of IMF gold. In essence, the US has given the IMF a $10 billion incentive to undertake tough reforms, but the question remains: Is the money enough of a temptation to change, particularly on the issue of tougher currency monitoring, something the IMF has resisted?

In the US, tougher IMF monitoring of foreign currency regimes is a demand that is about 5 years old, and is related to growing US industry demands that China be pressured to let is currency appreciate more quickly against the dollar. Many companies see the undervalued yuan as a factor that leads to cheap imports from China, which in turn, they argue, hurt US companies and jobs.

This demand has led to US jawboning that in 2005 prompted China to slowly let the yuan appreciate, and it has increased about 16 pct against the dollar since then. But industry groups want more, and in recent years it has become clear how reluctant both the US and the IMF are to do anything more, such as formally designate China as a country with a currency problem.

Top Treasury officials have said they want the IMF to cite China as a problem country first, but the implied response from the IMF has been: we're not moving until the US moves.

McCormick hit on this theme again last month, imploring the IMF to use new currency monitoring rules that now allow the IMF to formally identify currency misalignment.

"This step is fundamental to the IMF's future," he said. "If the fund does not act now by providing a strong multilateral voice for addressing exchange rate issues, we risk countries developing their own bilateral responses."

McCormick's request was well-founded: Since those rules were issued last summer, the IMF has made no new pronouncements on China. Other observers said they think that's all the IMF will ever deliver on China.

"It looks to me like they're just kicking the can down the road," says Morris Goldstein, a senior fellow at the Peterson Institute for International Economics and former deputy director of the IMF's research department. "They don't have any heart in it. They're not serious about it."

Another senior fellow at the Peterson Institute, Michael Mussa, a former chief economist at the IMF, is more optimistic. He notes that Strauss-Kahn is tougher on China than his predecessor was, and says this likely signals new support for those IMF staffers who want to take a tougher line on China.

Mussa also notes that European governments are increasingly critical of China's currency regime. "Sentiment around the world that the Chinese ought to appreciate more rapidly has strengthened in recent months," he said, which could make it easier for the IMF to move eventually.

But Mussa doesn't believe the IMF is much closer to formally acknowledging that China has a problem on currency. At some level, this reflects the sand in the gears that all multinational organizations face: the need to keep their members, including China, happy.

But whatever the reason, a frozen IMF that is reluctant to move on China is likely to make Congress think twice about approving IMF gold sales.

"As a practical matter, there needs to be some movement on exchange rates and other issues where Congress not happy with the IMF," before gold sales are approved, Mussa says.

Last month, McCormick said he hopes the gold sales proposal would be put before Congress before the Bush administration ends, but might have to be considered by a new Congress under a new administration in 2009 or even later. All told, it seems safe to bet on the latter, with an emphasis on "even later."

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