News Analysis: Global regulators head for battle of the decade

The upcoming IMF/ World Bank meetings look more contentious than ever

THIS YEAR'S annual meetings of the International Monetary Fund and the World Bank will take place during the worst global financial crisis for at least a decade. Discussion of how to alleviate the crisis, and how to handle future crises, will dominate the agenda, with topics such as emerging market debt relief given considerably less attention than usual.

Top of the discussion list will be the currency speculators. The speculators have not only been blamed for exacerbating the emerging market crisis by driving down currencies to excessively low levels, but recent developments at Long-Term Capital Management (LTCM) have also underscored the risks that the speculators pose to the financial system.

Last week, the US Federal Reserve was forced to co-ordinate an international bail-out of LTCM amid concerns that the collapse of the fund could endanger the health of the world's banks. The question of how, if at all, the hedge funds can be better-controlled - as well as how economies can protect themselves from the speculators' worst excesses - will take up much of the time of the hundreds of central bankers, regulators and finance officials due to gather in Washington over the coming week. They will be gathering as the US Federal Reserve's policy-making committee meets tomorrow amid rising expectations that it will cut interest rates.

Although the official meetings of the IMF and the Bank do not start until 6 October, most of the key topics will be discussed well in advance at a series of summits. Indeed, policy makers have already started airing the issues. Malaysia, for example, has been spearheading the "anti-speculator" movement for some time. Dr Mahatir Mohamad, the Malaysian Prime Minister, has been a long-term critic of the currency speculators. More recently, Dr Mahatir took concrete steps to protect his country from volatile capital flow by imposing capital controls.

Hong Kong has also jumped on the "anti-speculator bandwagon". Its recent decision to intervene directly in the financial markets to punish speculators who had, according to some, been "manipulating the markets", underscores Hong Kong's determination to defend its economy against a speculative siege.

Although Western delegates are expected to express concern about the excessive volatility of capital flows, many are worried that a retreat into protectionism could make the long-term situation worse. In a recent speech in Tokyo, Gordon Brown, the Chancellor, stressed that the appropriate response to the crisis was more globalisation, not less. He told Japanese bankers: "Protectionism anywhere is a threat to prosperity everywhere. Closing off national economies only increases national and international instability." This view is bound to lead to lively discussions with representatives of the emerging market economies over the coming days.

Discussion of the currency speculators will not be limited to the question of how economies can be better-protected from excessively volatile capital flows. Also high on the agenda is the question of how to control the hedge funds, particularly in the wake of last week's LTCM bail-out. International reaction to the bail-out gave a flavour of the discussion to come. Richard Baker, chairman of the Capital Markets Subcommittee of the US House of Representatives, said: "There needs to be clearer transparency in disclosure of risk to counterparties and investors and that does not appear to be the case at the moment."

As well as moves to force individual banks to disclose their exposure to hedge funds, there will also be discussion of whether tighter controls can be imposed on hedge funds . Hedge funds, as private investment partnerships that are often based offshore, are largely exempt from the stringent financial controls applied to banks.

The structure of the IMF and the World Bank is also set to be a hot topic of debate. The IMF, in particular, is facing a funding crisis, with resources close to record lows. The IMF has been accused of squandering the limited funds it does have available. Some have accused it of exacerbating the problems of the countries to which it lends by insisting on inappropriate economic reforms. Others have criticised the way in which its limited resources are used to defend embattled currencies, as was the case recently in Russia. The issue of "moral hazard" - whereby countries deliberately pursue inappropriate polices in the hope that the IMF will step in and pick up the tab - will also be on the agenda.

Britain and France have already stated their desire to see an overhaul of both the IMF and the Bank. In a recent speech in New York, Tony Blair, the Prime Minister, talked of building "a new Bretton Woods for the next millennium". But although the political mood in London and Paris may strongly favour reform, this is not the case elsewhere. Germany, for example, appears to be strongly opposed to overhauling the two international institutions. Hans Tietmeyer, president of the Bundesbank, said last week: "We don't need a new architecture or new organisations, we need new accents in policy."

Protectionism versus globalisation. More regulation versus less. New international institutions versus the status quo. The upcoming annual IMF/Bank meetings should be among the most contentious for many years to come.