Unraveling Controversy, Misinformation About IMF Bailouts

As Congress returned to work this week after its Presidents Day recess, it was divided over one of the most important issues on its agenda: President Clinton’s request to increase the lending resources of the International Monetary Fund.

In the heat of the debate, both sides have circulated a great deal of misinformation and partial truths. Here are the basic facts about this very complex issue.

Q.: Just exactly what is the IMF?

A.: It is a 182-country organization whose job it is to set rules for the international monetary system and help governments that get into economic trouble.

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Q.: How bad do things have to get before the IMF becomes actively involved in bailing a country out?

A.: Generally, the IMF enters the picture after a country is no longer able to pay its debts or is on the brink of default. In Asia’s case, it came in after global financial markets soured on the Asian economies and investors began pulling out. Such capital flight, as it is called, drove down the value of these countries’ currencies and sent stock and bond prices plummeting. The IMF lent money to each of these countries to tide them over in the short run, but only on condition that they strengthen their banking regulation and end “crony capitalism,” in which banks must follow the wishes of government bureaucrats in making questionable loans to state-subsidized conglomerates and businesses.

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Q.: Clinton has asked Congress for $18 billion to increase the U.S. contribution to the IMF. Why?

A.: When the Asian financial crisis broke last summer, the IMF asked its members to provide it with more money. At the organization’s annual meeting last fall, the United States and other members agreed to increase its total resources by $90 billion, from the current level of $200 billion. The U.S. share of the increase--known as its “contribution” in IMF parlance--is about $14.5 billion. The United States also agreed to help underwrite a new emergency fund to provide especially quick loans. The U.S. share of that is about $3.5 billion.

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Q.: Does the IMF really need this money?

A.: Not immediately, but it could if the Asian crisis worsens. The IMF has about $45 billion left in its lending coffers. If the current bailouts do not work--or the crisis spreads--the IMF’s resources could be strained. The IMF wants to have the money on hand in case the situation grows more serious. It also wants to assure the financial markets that it has the resources if it needs them.

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Q.: Won’t spending another $18 billion wipe out the modest budget surplus that the United States has begun to accumulate?

A.: No. The $18 billion is only issued as a line of credit. In return, the IMF provides the U.S. Treasury with a claim slip for the same amount--backed up by gold and other reserves. If the fund uses any of the money, it pays Uncle Sam interest. As a result, the money does not even show up as an outlay, and so the federal budget deficit is not affected. The risk for the United States is small. The IMF has $40 billion in reserves. And although some borrowing countries have briefly fallen into arrears, none has ever reneged on an IMF loan.

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Q.: Some lawmakers have complained that by going through the IMF, the United States is surrendering its sovereignty to an international organization. Is that true?

A.: Hardly. Under IMF rules, each country’s voting power is weighted according to its economy’s size. Decisions require approval by at least 85% of the weighted votes. The United States currently has 17.78% of the voting power, which means that it can veto any decision that it does not like. It also handpicks the IMF’s No. 2 man, the first deputy managing director. In fact, the United States so dominates the IMF that many other countries complain that it runs the international organization virtually as an instrument of U.S. policy. The IMF is doing what it is doing largely because Washington wants it to.

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Q.: Congress members have also complained that the IMF is too “secretive” and that it failed to give Asian nations enough warning that the crisis was coming.

A.: The main reason the IMF has been relatively secretive is that member countries--including the United States--want it that way. No government likes to see its dirty linen aired in public. The United States fired an IMF managing director in the early 1970s because he publicly criticized the U.S. government for running an excessive budget deficit. As for the Asian crisis, few on Wall Street saw it coming--including the highly respected U.S. rating services, such as Moody’s and Standard & Poor’s, whose main job is to provide such warnings.

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Q.: Critics say the IMF is dispensing overly harsh economic prescriptions that make its patients worse, at least in the short run. Is there any truth to this?

A.: Some. The IMF traditionally has lent money to governments that have gotten into financial trouble. In the Asian crisis, by contrast, it is primarily private companies that are bankrupt. Yet the fund has continued to demand that borrowing countries raise interest rates at home and cut back their budget deficits even more. The IMF says the higher interest rates are needed to prevent further capital flight, and the budget cuts are necessary to provide money for governments to bail out their local businesses. Critics say they only worsen the economic slump. To its credit, the IMF has been changing its prescriptions substantially since the Asian crisis began, but many experts believe it probably needs to do more. There is also the question of how such troubled countries might fare if the IMF did not lend them anything. They almost certainly would be worse off.

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Q.: Conservatives argue that the situation would be handled more efficiently if the United States and other industrial countries simply let the Asian banks and borrowers go bust and pick up the pieces by themselves--without money from the IMF. Would that really work?

A.: It would, but economists are split over how long it would take to recover and how much pain each country would have to endure in the process. Besides providing temporary loans to keep a country afloat, the IMF also serves as a “seal of approval” that shows the financial markets that the government is undertaking enough reforms to make it worth considering investing there again.

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Q.: Isn’t the IMF merely rewarding imprudent investors when it lends money to hard-hit countries? If investors know that the international organization eventually will be there to bail them out, they’re likely to take risks that they otherwise wouldn’t.

A.: There’s some truth to that, but it’s a difficult issue. Although the IMF lends only to central banks and government treasuries, not to commercial banks or businesses, the recipient governments use at least some of the money to help rescue commercial banks. Policy makers have yet to figure out where to draw the line. And in Asia’s case, investors, local banks, businesses and real-estate speculators all have taken staggering hits. The exposure of U.S. banks is relatively small this time. Japanese and other Asian banks are more heavily at risk, but authorities say forcing them to accept huge losses could have serious ripple effects in their own economies.

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Q.: Why should the United States get involved in bailing out these Asian countries at all? We didn’t create the crisis. And many of these countries are competitors that have shut U.S. goods out of their markets.

A.: The United States has both a strategic and an economic interest in helping these countries. Some, such as South Korea, are important militarily. And from the standpoint of the U.S. economy, helping these countries will reduce the pressure on them to export their way out of recessions. Although the United States did not create the crisis, many Asian countries believe it has some responsibility as their key ally and world leader to help them recover. U.S. reluctance to help the Thais last summer sparked widespread resentment in Asia.:

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The Biggest Bailouts

During the 52 years since it opened its doors, the International Monetary Fund has provided emergency loans to about 130 governments--including $500 million a year to the United States in 1963 and 1964. Here are the 16 largest:

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Year Country Amount 1997 South Korea $21.0 billion 1996 Mexico 17.6 billion 1997 Indonesia 10.1 billion 1995 Russia 6.5 billion 1997 Thailand 3.9 billion 1991 India 2.3 billion 1992 Brazil 2.1 billion 1981 Yugoslavia 2.0 billion 1984 Argentina 1.8 billion 1980 Turkey 1.7 billion 1983 Argentina 1.6 billion 1986 Mexico 1.6 billion 1988 Brazil 1.5 billion 1981 Romania 1.3 billion 1974 Italy 1.2 billion 1969 France 1.0 billion

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Dollar figures reflect rounding and conversion from IMF accounting units.

Source: International Monetary Fund