European Reluctance on IMF Raises Questions Over Revamp Pledge

By Rebecca Christie and Sandrine Rastello

Sept. 25 (Bloomberg) -- European nations are resisting the transfer of more power to emerging markets at the International Monetary Fund as Group of 20 leaders try to ensure its voting structure better reflects the world economy.

Europe’s leaders are “backing away” from their pledge to give countries including China more say in running the Washington-based lender, Marco Aurelio Garcia, an adviser to Brazilian President Luiz Inacio Lula da Silva, told reporters in Pittsburgh yesterday.

Aversion to the plan stems from a refusal by emerging markets to provide the 186-member IMF with more cash, a European official said on condition of anonymity.

G-20 leaders are using a summit in Pittsburgh to debate how to recalibrate the running of the IMF and World Bank as China, Brazil and other developing nations gain greater influence over the global economy following the worst financial crisis since the Great Depression. U.S. officials were optimistic that the effort would succeed.

“This is a necessary shift,” Treasury Secretary Timothy Geithner told reporters. “I don’t think there’s anybody who would not believe this is the necessary, appropriate shift in the basic balance of representation in these institutions. I think Europe recognizes that.”

Talks leading into this week’s summit focused on a 5 percent shift of so-called IMF quotas from countries with disproportionate influence, said two officials from G-20 nations, who spoke on condition they not be identified by name or nationality. Quotas determine members’ voting rights, financial commitments and access to IMF loans.

BRIC Nations

Brazil, Russia, India and China, the so-called BRIC nations, have been pushing for an even bigger increase. This month, they proposed a 7 percent shift in IMF quotas to emerging markets and developing countries “to correspond roughly to their share in world” gross domestic product. Developing countries also have been pressing for changes in the composition of the IMF board.

“The problem isn’t so much with Obama, it’s with the Europeans,” said Garcia. “They’re showing their poker faces.”

China has overtaken Germany to become the world’s third- largest economy with annual gross domestic product of about $3.9 trillion, according to Bloomberg data. China has a 3.7 percent voting share on IMF executive board decisions, compared with 3.2 percent for Saudi Arabia, whose economy is about one-eighth the size of China’s.

Future Imbalances

Garcia said an overhaul of the IMF was the “fundamental” first step toward preventing future imbalances of the global financial system. He added that Lula would insist that rich countries submit their policies to the same sort of rigorous oversight that Brazil and other developing countries have undergone for decades.

“If there’s no fundamental change, how are we going to confront the monetary problems that are coming?” he said.

Leaders from the G-20 also are discussing a U.S.-backed plan to give emerging markets more power at the World Bank, officials said.

Talks yesterday and today in Pittsburgh include a proposal to boost developing economies’ voting rights at the Washington- based development institution by 3 percentage points, said the officials.

The Obama administration is also leaving open the question of whether there could be a World Bank chief not chosen by the U.S. government.

“We have to look at the reform of the governance of international institutions as a whole, including the role the different countries play there and their leadership” Michael Froman, the White House liaison to the G-20, said in an interview with Bloomberg Television yesterday, when asked if the Obama administration would consider a non-U.S. head of the World Bank.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Sandrine Rastello in Pittsburgh at srastello@bloomberg.net;