IMF Creates Special Boarding Lane for 1st-Class Countries

One of the subplots of the global financial crisis has been the return of the IMF to center stage: $15.7 billion for Hungary, $16.5 billion for Ukraine, and $2.1 billion for Iceland, with talks continuing with Pakistan and other countries. The Hungary bailout, for example, looks a bit like the old IMF, which insisted on higher interest rates and fiscal austerity in exchange for loans. These conditions attached to past bailouts have made many countries reluctant to turn to the IMF; in South Korea, for example, domestic hatred of the IMF (the emerging markets crisis of 1997-98 is known as the “IMF crisis” in Korea) makes accepting money from it politically impossible.

In order to loan money quickly to countries that need it, the IMF today announced a new $100 billion Short Term Loan Facility offering three-month loans to countries that are deemed to be financially sound (public and private debt at sustainable levels) but are being buffeted by the financial crisis anyway. These loans will have essentially no conditions, and can be used to bolster foreign currency reserves to protect against currency crises, to recapitalize financial institutions, or for other purposes.

This should be a step in the right direction, but raises two issues. First, the IMF only has about $200 billion in lending capacity, and with over $30 billion allocated to Iceland, Hungary, and Ukraine, and $100 billion for “healthy” countries, it could be approaching that limit fast. G7 countries have already committed trillions of dollars to their domestic economies; $200 billion for the rest of the world could run out quickly, and raising more money from member nations would be politically difficult right now. (The US in particular is never keen to help out international organizations.)

Second, the new lending facility draws another line between the haves and the have-nots of the global economy. (The first line was drawn by the Federal Reserve in deciding who got swap lines – and, by the way, the Fed just made $30 billion each available to Brazil, Mexico, South Korea and Singapore.) Countries with the IMF’s seal of approval get loans with no conditions; other countries get the conditions that have been so unpopular in the past. This is more than a normative issue: in a financial crisis, falling on the wrong side of the line can exacerbate the problems faced by a country or a bank, because it saps confidence further and accelerates capital flight. The IMF has promised not to reveal the names of countries that are rejected for its no-condition loans in order not to destabilize them further, but speculators will speculate. And countries that do not qualify will harbor the same resentments of the IMF (and the perceived global economic order) as ever.

(IMF for Beginners, by The Big Money (from Slate).)

3 thoughts on “IMF Creates Special Boarding Lane for 1st-Class Countries

  1. Yesterday’s events on the multilateral fire-fighting front of the global crisis suggest the following to me:

    (1) The IMF and the FED (and hence the existing global lending of last resort arrangement) have revealed what their balance sheet and governance constraints allow them to put on the table: an approximate, combined US$60 billion for each pre-qualified EM. This is not going to be sufficient, if one of these economies ends up in serious trouble, as the scale of government interventions in advanced economies shows;

    (2) There is a need for a multilateral swap-line arrangement from EMs in surplus of foreign financing to EMs in actual or potential deficit, e.g., a mechanism to transfer FX liquidity within the BRICs.

    (3) China is willing to help, as the deal with Russia indicates, but seems to be wanting to impose its own, peculiar to say the least, energy-obsessed conditionality: not really what Walter Bagehot had in mind!

    (4) The BIS is the place to start to set up a realistic and effective global LOR framework for prequalified EMs. BIS is a multilateral institution where China and other systemic important EMs already dealing with each other, within a less distorted and constraining governance framework.

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  2. I really like these moves by the IMF and Fed. Grouping South Korea and Russia into the same “emerging market” category always seemed suspect to me and now it seems the IMF is also drawing distinctions between different levels of emerging market economies.

    As the owners of this blog has rightly pointed out, emerging economy problems could lead to political unrest and upheaval in Singapore, South Korea, Mexico, or Brazil seems like the last thing the US would want to see happen.

    On the other hand, I have to say that as an American I take some perverse enjoyment in watching Hugo Chavez sweat out lower oil prices in Venezuela and I do hope that our “friends” in Russia will be less bold in their military/political advances now that their economy is on less sound footing.

    These are the kinds of distinctions that are helpful if we are to consider the effects on emerging markets. We should not forget that in the pre-financial meltdown world, there were serious geopolitical issues caused largely by a decline in the dollar and food/energy price inflation. Some of those issues have abated now but newer, seemingly more serious ones have arisen.

    Perhaps some additional texture is needed to more clearly understand the downstream emerging market effects of the crisis?


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