WASHINGTON: The heads of the International Monetary Fund and World Bank pledged new resources Thursday to fight the worst global downturn since the Great Depression of the 1930s, while warning that the crisis is far from over.
Dominique Strauss-Kahn, managing director of the International Monetary Fund, said U.S. and European leaders need to fulfill pledges they made during a summit in London earlier this month to clean up their banking systems by removing distressed assets from banks' balance sheets.
With the right policies, the world economy could recover in the first half of 2010, he said.
"We still have long months of economic distress in front of us," Strauss-Kahn said.
Strauss-Kahn said there "may be need for more" stimulus spending by individual countries in 2010.
The IMF's board agreed to double the borrowing limits for 78 of the poorest countries in an effort to meet the needs of developing nations harmed by the downturn.
Also Thursday, World Bank president Robert Zoellick said it will provide $45 billion over the next three years to support road building and other infrastructure projects in poor nations.
The comments came as finance officials from around the world were gathering in Washington for three days of discussions beginning Friday that seek to resolve differences over the best approach to take to combat the current downturn.
The discussions are set to begin Friday with meetings of finance ministers from the Group of Seven wealthy nations - the U.S., Japan, Germany, France, Britain, Italy and Canada.
Those will be followed by talks over dinner that night among the Group of 20 nations, which adds major emerging powers such as China, Russia, India and Brazil to the mix.
Treasury Secretary Timothy Geithner will emphasize that repairing the U.S. banking system is a "top priority," a senior Treasury official said Thursday.
An "important component" of that effort are the "stress tests" that regulators are currently conducting on 19 of the nation's largest banks, the official said.
The tests measure how the banks will fare under a severe recession and are intended to determine which institutions need more capital.
The additional money, if needed, could come from the private sector or the government.
The Treasury Department is expected to release the framework for the stress tests Friday.
Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, said "there is a lot of foot-dragging and in some cases denial ... of just how systemic" the problem of bad assets is in the U.S. and Europe.
Reinhart criticized U.S. regulators for recently relaxing accounting rules to make it easier for banks to avoid marking down bad assets.
That's a "delaying tactic" intended to enable the banks to carry the assets for longer, she said.
The $45 billion in World Bank money is designed to support job creation and "help jump start a recovery from the crisis," he said.
He also said the U.S. and Europe should "reconsider old prerogatives" and allow developing countries a greater voice in management of the World Bank.
The $45 billion is $15 billion more than it spent on infrastructure efforts in poor nations compared with the three years before the crisis.
When that money is combined with increased efforts from an arm of the World Bank that supports private sector projects, the increased funding could total $55 billion, the World Bank said.
The effort is designed to give developing countries the same type of stimuli rich nations are providing to create jobs in the face of massive layoffs caused by the recession.
The initiative follows a tripling in lending to $12 billion announced earlier this week to support health, education and other safety net programs in poor countries.
The goal of both World Bank efforts is to ensure "we don't repeat the mistakes of the past," Zoellick said Thursday.
During previous financial crises in the 1980s and 1990s, governments in developing countries were forced to cut spending on infrastructure projects and social programs, he said.
"We saw social unrest, deprivation and even violence," Zoellick said.
"Poor people suffered most from the mistakes of others."
Also on the agenda for Friday's G-7 and G-20 meetings will be fleshing out the promises made at a meeting of world leaders earlier this month in London.
Leaders from the G-20 nations pledged April 2 to boost support for the IMF, the World Bank and other international lending organizations by $1.1 trillion to combat the global recession.
But the biggest chunk of that amount - $500 billion for an emergency lending facility at the IMF - is still short of the goal.
The U.S., Europe and Japan have committed roughly $100 billion each, and other countries have pledged much smaller amounts.
Strauss-Kahn said he expects new pledges this weekend.
China indicated in London that it would pledge $40 billion. Strauss-Kahn said he is meeting this weekend with Chinese officials to discuss the country's commitment.
That could be complicated since China and other big developing countries like India want to link their increased support to making progress on their long-sought goal for a bigger voice in the operations of institutions like the IMF.
This proposal is being resisted by various European nations who would lose some of their current voting powers.
The debate also could hinder efforts to reach agreement on a proposal to sell a portion of the IMF's vast gold reserves to provide more support for the poorest countries and to expand an IMF currency known as special drawing rights, a move that could provide support to poor nations.
Strauss-Kahn said in a separate speech Thursday that the IMF's governance should be reformed to "give more influence to emerging markers and low-income countries."
The U.S. also will seek to keep the pressure on European countries to follow through on their promises to boost stimulus spending. U.S. officials will ask the IMF to report on each country's progress, the senior Treasury official said.
European nations have resisted U.S. calls for more spending because of budget concerns.
There is general agreement that IMF resources need to be expanded in order to deal with the current financial crisis, which has caused severe hardships in a number of countries.
Already the IMF has put together emergency loan programs for Hungary, Serbia, Romania, Iceland, Ukraine, Belarus and Latvia.
Mexico, Poland and Colombia also have announced plans to tap a new, more flexible IMF line of credit designed to support emerging countries that are considered well managed.
Underscoring the extent of the challenges, the IMF released a new economic forecast Wednesday that projected that the world economy would shrink 1.3 percent this year, the first decline since World War II, and what the IMF called "by far the deepest global recession since the Great Depression."
Private economists said an output decline of that magnitude would leave at least 10 million more people jobless around the world. - AP
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