Global leaders meeting at the World Economic Forum this weekend have put forward plans to establish an international liquidity facility to prevent against - rather than mop up after - economic collapse.
The International Monetary Fund has stepped in to rescue a string of emerging nations, in some cases through no fault of their own policy, as banks have repatriated funds to their home markets, leaving the nations starved of cash.
In recognition of that dilemma, IMF First Deputy Managing Director John Lipsky said Saturday that the world needed to develop a new mechanism to protect against sudden halts in capital flows, and to prevent the need for countries to unilaterally stockpile excessive reserves.
"There needs to be a liquidity facility, better cooperative international facilities, presumably through the IMF, that will give confidence to those countries that are performing well that they will not be subject to the vagaries of sudden-stop capital flows," Lipsky said in a panel discussion on the global economy.
"We have adequate resources to respond to the demands that we see before us immediately; however, we think it's prudent at this time to have contingent facilities that would double the resources available to us."
The IMF currently has a total $250 billion through quotas and existing agreements, and wants to up that to $500 billion. The Japanese authorities have already offered $100 billion of that, Lipsky said, adding that he hoped to reach an agreement to secure the remaining $150 billion.
The backing of the U.S. administration, whose key members were notable in their absence at this year's forum, is likely to be crucial in enabling the move.
French Finance Minister Christine Lagarde and Montek Singh Ahluwalia, the deputy chairman of the Indian government's top economic policy think tank, were also on the panel and backed strengthening the IMF's capital.
The need for such a facility has been dramatically illustrated by the case of Turkey, which has had a responsible fiscal policy and whose banking system is generally regarded as being in fairly good shape.
Turkey has been in talks with the IMF over financial support since last year, but has clashed with it over its demands for fiscal adjustment, amid other issues.
In an interview with Dow Jones, Turkish Economy Minister Mehmet Simsek said he was very confident that these differences would be ironed out. But speaking generally, he said that the IMF should adopt a more flexible approach in providing aid to countries that are in need due to global forces rather than their own policy decisions.
"Having a lender of the last resort for provision of hard-currency liquidity is actually for the benefit of the rest of the world," he said.
The harsh conditions demanded by the IMF for its support were also highlighted by U.K. Prime Minister Gordon Brown, who noted that existing global institutions were created for a far more sheltered world.
While the IMF is now acting to prop up economies that have suffered a flight of capital they can't withstand, it would be far better to take early action to prevent such collapse, Brown said.
"We should have a system where you can act earlier to prevent the collapse and be able to, in this case, recapitalize the banks and at least get lending moving again," Brown said, when asked what was the single most important thing he'd do to change the financial structure.
"What you've got to do is have a preventative facility which deals with crisis prevention, rather than crisis resolution," he said.