IMF chief Koehler admits mistakes in lending strategy

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With his organisation's credibility on the line as rarely before, Horst Köhler, the head of the International Monetary Fund declared yesterday that the IMF was necessary for the world economy, but acknowledged that changes were needed to improve its performance.

On the eve of the IMF and World Bank annual meetings here, likely to be marked by large anti-globalisation protests, IMF managing director Mr Köhler admitted that the fund's surveillance of potential problem areas had been faulty, and that money had been lent too freely and for too long to countries which had no hope of sustaining such debt.

"The IMF is in the process of change," he said, addressing the complaints of demonstrators that its activities, and those of other international financial institutions, only increased the gap between rich and poor. "But the objective should be not less globalisation, but more and better globalisation."

Mr Köhler was speaking as the fund faces two massive tests in Latin America. One is the unprecedented crisis in Argentina and brutal slump following the breakdown of IMF-sponsored programmes last December. The other is Brazil, to which the fund extended a $30bn standby credit last month, but where the likely victory of a left-wing candidate and IMF critic in next month's presidential election has sparked a collapse of confidence in that country's economy.

"We are hoping we can come to a new agreement, but it has to make sense," Mr Köhler said, amid warnings from Roberto Lavagna, the Argentinian Economy Minister, that without new money from the fund, Argentina would have no alternative but to default on existing debt to the fund and other multilateral institutions.

To preserve defences for the battered national currency the peso, Argentina is refusing to use the $9.5bn of remaining reserves to pay about $2.2bn due to multilaterals before the end of 2002. Some analysts believe a default could come as soon as early October.

Theoretically, that would sever the country's only source of financing and relegate it to the ranks of world financial outcasts that includes Iraq and Sudan. Argentina already defaulted in January on $95bn of privately held debt.

The usually restrained Interior Minister, Jorge Matzkin, recently summed up the fraught mood, noting that there were "opinions from the IMF that even the most patient and flexible [Argentinian] people are becoming sick and tired of".

Mr Köhler and Mr Lavagna are due to hold talks on the sidelines of this weekend's meetings to try and end the impasse. But yesterday, Anne Krueger, the fund's deputy managing director, made it clear there the IMF would not simply give way. "It would not be the end of the world" if the talks broke down, she said, warning of "serious consequences" of default.

The IMF's nightmare would be if Brazil, Latin America's biggest economy, followed a similar path, despite the $30bn facility. The likelihood that Luiz Ignacio "Lula" da Silva, the Workers' Party candidate, will win next month has driven its currency, the real down 40 per cent this year.

Mr Köhler said he had been assured by the WP candidate that he supported the main elements of the fund's programme for Brazil. But Mr da Silva has warned against reliance on the fund. Brazil and Argentina's recovery "will come from the productive capacity of industry and agriculture and tourism ... not from borrowed money."