The IMF has finally stepped into the limelight with three high-profile rescues in three days, passing the first test of whether it can resume a leadership role as emerging economies pay the price for a credit crisis spawned by the world’s richest nations.
However, the International Monetary Fund will have no time to rest on its laurels as it faces an even tougher challenge of quickly cobbling together a way to get hard currency into the hands of countries squeezed by financial market turmoil. The IMF’s board is expected to consider a liquidity swap fund on Friday. Credit strains are becoming increasingly severe in many emerging economies and the swap line would provide a group of pre-approved advanced emerging economies with short-term financing carrying few or no conditions.
“I think it’s good that the IMF is doing some creative thinking and trying to figure out how it can potentially add tools to its toolbox during a financial crisis,” Clay Lowery, assistant US Treasury secretary for international affairs, told Reuters. “They’re trying to make sure they do this effectively and constructively and very efficiently so I would imagine that, from a timing perspective, people are going to be having to think about this happening fairly soon.”
While its economic forecasts and warnings have proved quite accurate over the past 18 months, the IMF has been criticized for failing to sound the alarm on lax oversight and reckless lending, particularly in its host country, the United States. Many developing countries have complained that the IMF did not publicly reprimand rich countries for the sort of poor oversight that would probably have drawn a stern rebuke, had it taken place in an emerging market.
As the IMF puts the finishing touches on the liquidity facility, early victims of the crisis have had little choice but to sign on to the IMF’s stand-by loan packages -- albeit with fewer strings attached than usual.
On Friday, the IMF unveiled a $2.1 billion package for Iceland. That was followed on Sunday by an agreement in principle for a $16.5 billion deal with Ukraine and an economic rescue package for Hungary, which promises to include substantial funding from both the IMF and the European Union. Emerging economies have spent the last 10 years reforming their markets and fiscal policies, resulting in rising international reserves and current account surpluses. But the global crisis has forced them to tap those funds to protect their currencies and bolter confidence.
Charles Dallara, managing director of the Washington-based Institute of International Finance, the world’s only global association of financial institutions, says it is important that the IMF moves quickly to set up the new fund. He said the situation for emerging market economies had been unintentionally worsened in recent weeks by Western European and US government measures to guarantee bank deposits. Dallara said the guarantees often did not cover the subsidiaries of major Wall Street or Western European banks in emerging market economies.
“When you inject capital into the parent, it may or may not benefit the subsidiary,” said Dallara, whose association represents 375 of the world’s biggest financial institutions and banks with headquarters in 70 countries. “Certainly, the credit concerns you’ve had in the interbank markets in Western Europe and the US have unwittingly transmitted themselves into interbank credit problems in emerging markets,” he added. “There is no reason in the world why a well-capitalized subsidiary of a weak parent should suffer in the interbank funding market in a local economy, such as Poland or Hungary,” he said, adding, “But that is what is happening.”
The IMF has been slow to come up with an instrument specifically designed for emerging economies and has worked on the concept for more than five years, dating to the Contingency Credit Line that was eventually scrapped in 2003 because it found no takers. A follow-up Reserve Augmentation Line was proposed in 2006, but failed to go further.
Treasury’s Lowery saw three roles for the IMF in the current financial crisis, including monitoring countries’ economies, helping countries facing balance-of-payments crises, and as a backstop for others with sound economies but who may be facing liquidity strains because of tight credit markets. (Reuters)