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Tables Turned: Poor Countries Wag Fingers at Rich Ones

Published: October 22, 2007
WASHINGTON, Oct. 21 — The semiannual meetings of the world’s top finance and banking officials are predictable in one sense: Europeans and Americans often use them to lecture leaders of poor countries about the need to modernize their capital markets, promote transparency and adhere to sound investment standards.

What a difference a subprime mortgage crisis can make. Now developing countries are lecturing the West.

With hundreds of officials and experts convening over the weekend in the nation’s capital, the theme this year was not fear of protesters, but of the global impact of the troubles in the American housing sector, with many delegates faulting lax regulations and sleepy overseers in Europe and the United States.

“Allow me to point out the irony of this situation,” Guido Mantega, the Brazilian finance minister, told reporters, contending that the “countries that were references of good governance, of standards and codes for the financial systems” were now the same countries where financial problems were threatening to wreck global prosperity.

In an interview, Trevor A. Manuel, the finance minister of South Africa, said: “If one looks at the impact of the subprime crisis in the U.S., the losers are poor citizens who tend to be black and Hispanic. But it is also the large banks with an international profile in Europe and the United States that have taken a beating.”

He added, “It is clear that there was regulatory and supervisory failure.”

The finance ministers and central bank governors from around the world spent the weekend discussing the market turbulence brought on by the credit crisis, declaring in a statement that they would continue to “analyze the nature of the disturbances and consider lessons to be learned and actions needed.”

But for many, the lessons were already clear. They said that Western regulators had ignored warning signs, Western banks had used exotic off-the-books “conduits” to buy and sell dubious mortgage products, Western rating agencies had gone along for the ride — and now the whole world was suffering from Western excesses.

Usually these meetings echo the old debates of what used to be called the north-south dialogue, in which the prosperous countries come to the rescue of the struggling poor countries. A few hundred protesters in Washington this weekend shouted slogans about exploitation by the wealthy. Along with protesters, of course, were closed streets, police barricades and limousines idling at many downtown hotels.

There was also new finger-pointing, and perhaps schadenfreude, discernible in the statement of the G-24 group of poor countries led by finance ministers of Argentina, Syria and Congo, who noted that “developing countries are a new driving force as well as a stabilizing factor in the world economy.”

Like the other ministers from what used to be called the third world, they cited the advanced countries’ regulations and lack of transparency as causes for the mess. These countries are united in demanding more weight for themselves on the board of directors of the I.M.F. and the World Bank.

In response to all this lecturing, the United States Treasury secretary, Henry M. Paulson Jr., and his top aides fanned out at meeting after meeting to assure the finance ministers that although the impact of the market turmoil has yet to be fully understood or felt, there was no need to panic because the fundamentals of the American economy are sound.

“We recognize that there are some issues in the system that need to be addressed,” said Clay Lowery, an assistant Treasury secretary for international affairs, cautioning against quick remedies that might be counterproductive. “We want to make sure that there isn’t a rush to judgment.”

Robert K. Steel, a Treasury under secretary for domestic finance, told audiences how Treasury had worked with banks to create a new superfund aimed at loosening the credit markets.

“The technical organization of this solution is complex,” he told the Institute for International Finance, a global association of banks, insurance companies and other institutions. “Initial progress is being made by the lead banks and participation is expected to broaden in the weeks ahead.”

But many listeners were doubtful. Mr. Manuel, the South African finance minister, noted that the new fund had already gotten a skeptical response in speeches this weekend by Alan Greenspan, the former Federal Reserve chairman, and Michel Camdessus, former head of the International Monetary Fund.

Josef Ackermann, chairman of Deutsche Bank, also expressed skepticism in an interview. “It would be premature to make a firm judgment, as not all details have been made known to us,” he said, speaking for the board of the Institute for International Finance.

Mr. Paulson and Mr. Steel told audiences that the United States had already set up advisory panels on auditing and regulations in the financial services industry. But their emphasis was on the industry itself setting up new codes of “best practices,” and not on government regulations.

“We’re making progress, and working our way through the turmoil of capital markets,” Mr. Paulson said after meeting with the finance ministers of Europe, Canada and Japan. “We’ve got a ways to go. But we can all come together and say how we can learn from some of the mistakes and make some corrections.”

The developing countries were not alone in giving a cold reception to the idea of voluntary action. Many European delegates were skeptical of the Bush administration’s tack on the issue, which parallels its call for voluntary measures to regulate hedge funds and “sovereign wealth funds,” the government funds run by China, Russia and oil exporting countries that have begun to invest heavily in the West.

“We can’t say this crisis was totally unexpected, but we didn’t anticipate how this turmoil would happen, or when or how,” Joaquín Almunia, the European commissioner for economic and monetary policy, said in an interview. “We may need to adopt some new regulations, but right now our emphasis is on diagnosing the problem.”

Much of the anger among developing countries was focused on the International Monetary Fund, which along with the World Bank was the host of the Washington meetings.

The fund, which makes emergency loans to bail out countries threatened with insolvency, is widely detested in the developing world because of its stringent austerity programs imposed as a price for its bailouts.

Asian and Latin American countries rescued in the 1990s, many of them now healthy because of their exports, have paid off their loans to the fund but are still smarting from the lectures they got and the tax increases they were forced to adopt.

The G-24 developing countries offered a stinging rebuke to the fund, lecturing it for in effect dropping the ball while banks in the West invested recklessly in subprime mortgages using lending facilities that were off their balance sheets.

Fund officials were also defensive on that unusual rebuke. Rodrigo de Rato, the outgoing managing director of the fund, and a former finance minister of Spain, said it was unfair to castigate his organization for laxity.

Pulling out a paper issued by the fund last April, he said it proved “we were already clearly stating our concerns” about the situation. Indeed, the paper did warn that “the subprime segment of the U.S. housing market is showing signs of credit quality deterioration” and that the problem could “deepen and spread to other markets.”

Edmund L. Andrews contributed reporting.
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