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Global meltdown making IMF relevant again

/ Source: The Associated Press

Not long ago the International Monetary Fund seemed headed for relic status. Now it's once more flying high, rolling out ambitious plans to blanket an economically distressed world in dollars. Even grander designs are on the drawing board.

Yet the money might not cover the job and those lofty plans might never get approved.

Failure would carry a heavy political price because the Group of 20 countries have made the lending agency the linchpin in their efforts to combat the worst economic downturn since the Great Depression.

Finance ministers from those nations met over the weekend to hammer out details of the $1.1 trillion plan that President Barack Obama and his G-20 counterparts announced at their recent summit in London.

Major developing nations scored a victory Saturday when the IMF announced that it would sell bonds to help raise a portion of an expanded $500 billion IMF loan fund that is the biggest part of the G-20 support program for the IMF.

China, Brazil, Russia and India had balked at providing contributions under the original approach favored by the United States and Europe.

Even with a deal, however, it's not clear that the IMF's pool will have enough to jump-start the economy.

The IMF estimates that before the downturn bottoms out, the agency could provide around $187 billion to recession-battered nations. That would dwarf the $86 billion during the 1997-98 Asian crisis, which leveled countries from Thailand to Russia and Argentina.

The projected lending spree is quite a change from a year ago, when the IMF appeared headed to irrelevance. The long global boom meant countries were coming much less often, hat in hand, seeking assistance.

The IMF was scrambling to pay its bills and trim down. Its major source of income, loan repayments, had fallen sharply.

Today the agency is expanding again, approving loans to a string of countries. It's not clear whether the boost in resources will be enough.

The key is whether the broken banking systems in the United States and elsewhere can be repaired quickly enough so normal lending can resume to consumers and businesses. This lending is needed to spur an economic rebound in industrial countries, which leads to increased demand for developing nations' exports.

On Friday, regulators summoned executives from the 19 largest U.S. banks and told them what government tests showed about shortfalls in their institutions' capital reserves.

Despite the $700 billion bank bailout, credit flows in the United States have not reached the level to get a sustained recovery going.

More problems lie ahead. Banks are struggling not only with billions of dollars in losses on mortgage loans, but also rising bad debt in commercial real estate and consumer credit cards.

"We would be wrong to conclude that we are close to emerging from the darkness that descended on the global economy early last fall," Treasury Secretary Timothy Geithner said somberly at weekend meetings of the IMF and World Bank.

One of the Obama administration's main worries is that other countries will not be bold enough in their stimulus efforts or in fixing their own banking systems as loan losses mount.

An IMF study estimate losses on U.S. loans and securities at $2.7 trillion through 2010, double the estimate of six months ago; g1obal losses were put at $4.1 trillion.

The agency also faces questions about how it should change to better cope with the problems of a global economy vastly different from what existed when the institution was created in the 1940s.

Some suggest ideas that would transform the agency into a kind of U.N. Security Council for economic matters, with the power to blow the whistle when economic practices in any country threaten the global economy.

But the IMF has trouble exercising the limited monitoring powers it now has. Rich and poor nations alike bristle at even the mild suggestions contained in the IMF's annual performance reviews.

Major developing countries such as China, Brazil and India are pushing to obtain greater voting powers at the IMF in line with their growing roles in the world economy. This dispute is threatening to derail the efforts to boost IMF resources.

The battle over tiny changes in voting shares is evidence of the many hurdles to overcome before the IMF can increase its powers as the globe's economic traffic cop.