Strauss-Kahn Says IMF May Need Another $150 Billion for Crisis

By Christopher Swann

Jan. 12 (Bloomberg) -- The International Monetary Fund may need another $150 billion to help counter the hit to emerging markets and poorer countries from a worsening global economic downturn, Managing Director Dominique Strauss-Kahn said.

The IMF chief, in an interview in Washington, also chided European leaders for failing to grasp the depth of the coming slump in their region, creating the risk of social upheaval. The fund will make a “significant” increase in its $1.4 trillion projection of global financial losses and writedowns, he added.

The remarks by Strauss-Kahn, a former French finance minister and presidential contender, may help build momentum for proposed stimulus packages in Germany and France. They also indicate that the fund may put pressure on nations with large foreign-exchange reserves, such as China and Saudi Arabia, to step up contributions.

“If in six months from now the crisis has worsened and many other of our members need our help, the demand may be above what we have,” Strauss-Kahn said in the Jan. 9 interview in his office. “If the political decision is made to do something, I’m convinced that it will not be difficult to find the extra $150 billion” that would double the lender’s resources compared with a year ago, to a total of $500 billion, he said.

He warned there will be “some decrease” in the IMF’s economic forecasts. In November, the fund predicted global growth of 2.2 percent this year, with U.S. gross domestic product shrinking by 0.7 percent, Japan’s by 0.2 percent and the euro area’s by 0.5 percent.

Jump in Lending

Strauss-Kahn, 59, has already overseen the steepest jump in fund commitments in its six-decade history. The IMF agreed to lend $41.8 billion to troubled economies in November, its largest monthly pledge on record. While Japan in November pledged an additional $100 billion to boost fund resources, other nations have yet to commit to help.

Much of the aid so far has been allotted for Eastern European nations, where policy makers beset by budget deficits and sliding currencies have struggled to contain the economic slump. Strauss-Kahn spoke before departing on a trip that includes a stop in Budapest tomorrow.

In Western Europe, governments are “behind the curve” in implementing stimulus packages and are “still underestimating the needs,” said Strauss-Kahn. The full impact of the downturn has yet to hit the region, where the “shops are still full,” he said.

German, French Plans

German lawmakers are deliberating what would be the second stimulus package in two months, of as much as 50 billion euros ($67 billion). In France, President Nicolas Sarkozy last month laid out a proposed 26 billion euro initiative -- including infrastructure investment, tax breaks for small businesses, rebates for car purchases, and a 200-euro payment for 3.8 million impoverished households.

Thomas Mayer, co-chief global economist at Deutsche Bank AG, estimated that, on an equivalent basis, European plans will likely amount to about 1.5 percent of GDP, less than half the 3.6 percent boost the U.S. will probably get from a stimulus.

“In the coming months I am afraid that the psychology will be the same in Europe as in the U.S.,” said Strauss-Kahn, who was France’s finance minister from 1997 to 1999 and sought the Socialist Party’s nomination to run for president in 2007. “A rate of growth between minus 1 and minus 2 percent may have some really strong social consequences.”

Violence in Europe

Greece last month was wracked by violence when killing of a teenager by police set off days of protests that increasingly focused on the government’s economic policies.

Strauss-Kahn also expects the European Central Bank to lower interest rates further. The ECB meets Jan. 15, and economists and investors anticipate a 0.5 percent reduction in the benchmark rate to 2 percent.

The IMF chief didn’t specify what steps the ECB ought to take beyond lowering rates, saying he favored any policies that worked to stabilize the financial system. The Federal Reserve in the U.S. has lowered its main rate to zero to 0.25 percent, and more than doubled the size of its balance sheet in an effort to thaw frozen credit markets.

“Rates in Europe will probably go down in coming months,” he said. “A decrease in interest rates is welcome but the impact will not be very important.”

In the U.S., President-elect Barack Obama is seeking authorization from Congress for about $775 billion to fund tax cuts and spending on everything from roads and schools to the energy network. He’s aiming to save or create 3 million jobs in an economy that lost almost 2.6 million last year.

Praise for Obama

“The Obama administration and the outgoing administration have really taken the measure of the push that is needed,” Strauss-Kahn said in the interview. At the same time, he warned that tax cuts might have “very little impact on growth” unless targeted only at “the most vulnerable,” who are likely to spend the extra cash.

Turning to Russia, the IMF chief played down concern about a collapse in the nation’s economy, saying its currency reserves, which amounted to about $438 billion in December, offer a safeguard. “The huge amount of reserves that they have puts Russia in a position where they should not be afraid of too big a destabilization of the Russian economy.”

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net.