Cut Is Not 'Taboo' If Needed, He Says : German Bank Chief Eases Stand on Rates 
International Herald Tribune
October 6, 1998
Alan Friedman and Jonathan Gage 

Hans Tietmeyer, the president of the central bank of Germany, reversed course Monday and abandoned his categorical opposition to any reductions in German interest rates. But he made it clear that the Bundesbank would move only if the global economic crisis worsened.

Mr. Tietmeyer has spent the last few days vehemently rejecting the idea of any cuts — the key rate is now 3.3 percent — even though international financial officials are predicting in private that the Bundesbank might have to act.

On Monday, under persistent pressure from other leading financial officials meeting here, Mr. Tietmeyer said that if conditions in the world economy warranted a cut, "we would not make it a taboo from the outset."

"Should there be a worsening of the crisis," Mr. Tietmeyer said at a news conference, "additional action would be needed. That could possibly include monetary policy."

Mr. Tietmeyer's new, more flexible stance emerged against the backdrop of increasing pessimism about the global economy among the top government officials and private-sector bankers attending the annual meetings here of the World Bank and the International Monetary Fund.

As they met, there were growing signs that the downturn of the world economy and markets was forcing industrial nations to accept the idea that some forms of temporary capital controls, although anathema to them, may be inevitable in some emerging economies.

Even before the Bundesbank chief spoke, a senior IMF official, speaking on condition of anonymity, said: "The Europeans are realizing they cannot escape the global slowdown. Don't pay attention to what they say about not wanting more interest-rate cuts. Watch what they will do."

Kenneth Courtis, the chief economist in Asia for the Deutsche Bank group, said: "To get out of this global crisis, the United States will have to cut rates much more substantially and fast, and Europe is going to have to get rid of its complacency and relax interest rates and ease fiscal policy."

Mr. Courtis said that Europe had been holding firm on interest rates because of the desire for monetary discipline ahead of the introduction of the single currency, the euro, next year.

But, he added, if rates were not cut in Europe, "then the euro will become overvalued and smother growth."

And George Soros, the international financier and hedge-fund manager, predicted that the Group of Seven leading industrial nations would go ahead with a coordinated interest rate cut, which he termed "inevitable." But he said the cut would not be sufficient to solve the global crisis, which he said could lead to "a breakdown of international capitalism."

Several leading American and European private-sector bankers and international financial officials said here in recent days that they believed there was a 50-50 chance of global recession, although they also said it was possible that the world would, as one banker put it, "bump along with very low growth for the next year or two."

They expressed the fear that the current turmoil in the financial markets could continue for the next six months.

They said that economic growth in the United States could slow to as little as 1 percent to 1.5 percent next year.

They said that growth in Western Europe could slow to about 2 percent, with European unemployment likely to increase again by next summer.

These bankers and officials, all speaking on condition of anonymity, were harshly critical of the apparent inability of either the G-7 industrial nations or the International Monetary Fund to do more than discuss a plethora of widely differing proposals for reforming the global financial system.

It is in this context that the idea of some developing countries' moves to impose capital controls have gained a measure of acceptance.

The IMF itself said late Sunday night that even though banning capital movements was never an effective long-term measure, there were some circumstances in which it might be appropriate.

"There is a sense that global capitalism is on the defensive," said Robert Hormats, deputy chairman of Goldman Sachs International. "As new rules of the game are written, there is likely to be less freedom for the movement of capital, more capital controls."

Prime Minister Mahathir bin Mohamad of Malaysia has been the most vociferous proponent of capital controls. He imposed them on his country last month.

Several developing nations applauded Mr. Mahathir's move as the only way a developing country could protect itself from speculative money flows and capital flight.

On Monday, a Japanese Finance Ministry official also defended Malaysia's move. The official said: "Everybody should face reality. In that sense, capital controls can exist."

China on Monday welcomed the new acceptance that capital controls can be justified in certain circumstances.

A senior central banker in Beijing told Agence France-Presse that, given the current global crisis, "it is preferable that certain developing countries should exercise controls, particularly on the movement of short-term capital."

He added, however, that over the long term a liberalization of capital markets was better for economic growth.

In Washington, the Group of 22, a grouping of industrial and developing nations seeking ways to strengthen the world financial system, said that the use of capital controls "should be considered only in exceptional circumstances and in conjunction with IMF-supported programs of policy adjustments to create the conditions required for the restoration of financial and macro-economic stability."

The G-22, whose finance ministers and central bank governors were meeting Monday night with President Bill Clinton, announced a series of recommendations aimed at increasing transparency on the part of the private sector, governments and the IMF.

The G-22 was expected also to welcome recommendations to improve bank supervision.

Commenting on the way the idea of capital controls was gaining ground, Mr. Courtis of Deutsche Bank said, "The train has already left the station."

He added that if the United States, Japan and Germany "don't move aggressively to create demand, the pressure on emerging markets will be so intense that they will find it difficult to avoid the fatal temptation of capital controls."

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