Problems mount but IMF smiling ahead of summit

By Mark Egan

WASHINGTON (Reuters): The world economy is slowing, America could be headed for recession, the stock market bubble has burst and Turkey's economy is in tatters, but as it prepares for its spring meetings, the International Monetary Fund (IMF) is happy.

Not that the IMF isn't worried about those things as it readies itself for next week's gathering. It is. But those who work in the lender's bunker-like building in downtown Washington have good reason to be more relaxed now.

Because these days, the fund's critics are relatively silent. No one is calling it the devil incarnate and no one is demanding that it shut its doors. And, unlike during the Asian financial crisis of 1997-1999, no-one is accusing the IMF of whistling past the graveyard as myriad economies crumble.

And the protesters who marred the IMF's meetings in Washington last April and in Prague last September have been diverted -- they are planning to vent their ire at an international trade summit in Quebec this week.

Even its most ferocious detractors have had to admit that the IMF has improved itself in leaps and bounds in recent years. And that leaves the fund to do what it likes best -- discuss economics and reform in a low key environment without the glare of the media and protesters.

Since the Asian crisis, the IMF has undertaken a slew of reforms in response to a barrage of criticisms.

Loans have become smaller, there is a presumption of early repayment, interest rates have been hiked on fund loans to reduce reliance on IMF money and fewer conditions are being attached to loans.

Most importantly, the majority of emerging economies have adopted floating exchange-rate regimes, leaving them less prone to financial shocks, and have become much more transparent.

Those improvements have been reflected in the crises in Turkey and Argentina, which although not yet resolved have not caused the type of contagion seen in the Asian debacle.

The most important item on the IMF reform agenda at next week's meeting will be early warning systems, or how the IMF can better spot problems in emerging economies before they erupt into full-blown crises.

That is one topic the fund's Managing Director Horst Koehler, the new Bush administration and even the institution's critics can agree on.

The IMF should be better at spotting crises earlier -- something hard to dispute.

"There is a big push on crisis prevention and instilling good policies before problems arise," Karin Lissakers, the United States' former executive director on the IMF's board, said in an interview on Wednesday.

Indeed Koehler has made crisis prevention one of his top priorities as head of the IMF, a job he took over last year.

"The main lesson from the financial crises of the past is that crisis prevention must be at the heart of the fund's mandate," Koehler said in a recent speech.

"Much remains to be improved ...(in) the early detection of vulnerabilities and signs of potential crises, and the development of practical economic policy approaches to counter those developments," he said.

As part of that push, Koehler has promised to set up a new department to monitor capital markets around the world. But the real bone of contention is what to do once the problems have been spotted early.

U.S. Treasury Secretary Paul O'Neill has gone further than Koehler, saying the IMF should act as a whistle blower on nations that pose a systemic risk but ignore its advice.

Fred Bergsten, director for the Institute for International Economics, wants the IMF to "go public and blow the whistle on countries if they do not take appropriate action."

"Once you anticipate problems you still need early action," said Bergsten.

But telling on member countries would take a seismic shift in the IMF's culture -- one Lissakers does not see happening.

"I don't think the majority would support it because of the concern that the institution would be triggering a crisis that it wants to avoid," Lissakers said.

"I do not thing the notion that the fund should act as a rating agency for countries is viable ... there are rating agencies that do that," she added.

Other topics to be discussed at the meetings will be reducing the conditions on IMF loans, combating poverty and closer cooperation with the World Bank and the thorny issue of the role of the private sector in bailouts.