The IMF and the Next Crisis

By Joseph Joyce. Cross posted from Angry Bear

The IMF has issued a warning that “increasing financial market turbulence and falling asset prices” are weakening the global economy, which already faces headwinds due to the “…modest recovery in advanced economies, China’s rebalancing, the weaker-than-expected growth impact from lower oil prices, and generally diminished growth prospects in emerging and low-income economies.” In its report to the finance ministers and central bank governors of the Group of 20 nations before their meeting in Shangahi, the IMF called on the G20 policymakers to undertake “…bold multilateral actions to boost growth and contain risk.” But will the IMF itself be prepared for the next crisis?

The question is particularly appropriate in view of the negative response of the G20 officials to the IMF’s warning. U.S. Treasury Secretary Jacob J. Law sought to dampen expectations of any government actions, warning “Don’t expect a crisis response in a non-crisis environment.” Similarly, Germany’s Minister of Finance Wolfgang Schaeuble stated that “Fiscal as well as monetary policies have reached their limits…Talking about further stimulus just distracts from the real tasks at hand.”

The IMF, then, may be the “first responder” in the event of more volatility and weakening. The approval of the long-delayed 14th General Quota Review has allowed the IMF to implement increases in the quota subscriptions of its members that augment its financial resources. Managing Director Christine Lagarde, who has just been reappointed to a second term, has claimed the institution of new Fund lending programs, such as the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL), has strengthened the global safety net. These programs allow the IMF to lend quickly to countries with sound policies. But outside the IMF, Lagarde claims, the safety net has become “fragmented and asymmetric.” Therefore, she proposes, “Rather than relying on a fragmented and incomplete system of regional and bilateral arrangements, we need a functioning international network of precautionary instruments that works for everyone.” The IMF is ready to provide more such a network.

But is a lack of liquidity provision the main problem that emerging market nations face? The Financial Times quotes Lagarde as stating that any assistance to oil exporters like Azerbaijan and Nigeria should come without any stigma, as “They are clearly the victims of outside shocks…” in the form of collapses in oil prices. But outside shocks are not always transitory, and may continue over long periods of time.

There are many reasons to expect that lower commodity prices may persist. If so, the governments of commodity exporters that became used to higher revenues may be forced to scale down their spending plans. Debt levels that appeared reasonable at one set of export prices may become unsustainable at another. In these circumstances, the countries involved may face questions about their solvency.

But is the IMF the appropriate body to deal with insolvency? IMF lending in such circumstances has become more common. Carmen M. Reinhart of Harvard’s Kennedy School of Government and Christoph Trebesch of the University of Munich write that about 40% of IMF programs in the 1990s and 2000s went to countries in some stage of default or restructuring of official debt, despite the IMF’s official policy of not lending to countries in arrears. Reinhart and Trebesch attribute the prevalence of continued lending (which has been called “recidivist lending”) in part to the Fund’s tolerance of continued non-payment of government debt.

More recently, the IMF’s credibility suffered a blow due to its involvement with Greece and the European governments that lent to it in 2010. (See Paul Blustein for an account of that period.) The IMF ‘s guidelines for granting “exceptional access” to a member stipulate that such lending could only be undertaken if the member’s debt was sustainable in the medium-term. The Greek debt clearly was not, so the Fund justified its lending on the grounds that there was a risk of “international systemic spillovers.” But the IMF’s willingness to participate in the bailout loan of 2010 only delayed the eventual restructuring of Greek debt in 2012. The IMF now insists that the European governments grant Greece more debt relief before it will provide any more financial government.

Reinhart and Trebesch write that the IMF’s “…involvement in chronic debt crises and in development finance may make it harder to focus on its original mission…” of providing credit in the event of a balance of payments crisis, its original mission. Moreover, its association with cases of long-run insolvency may “taint all of its lending.” This may explain the limited response to the IMF’s programs of liquidity provision. Only Colombia, Mexico and Poland have shown an interest in the FCL, and the Former Yugoslav Republic of Macedonia and Morocco in the PLL.

Even if the IMF receives the power to implement new programs, therefore, its past record of lending may deter potential borrowers. This problem will be worsened if the IMF treats countries that need to adapt to a new global economy as temporary borrowers that only need assistance until commodity prices rise and they are back on their feet. The day when the emerging market economies routinely recorded high growth rates may have come to an end. If so, debt restructuring may become a more common event that needs to be addressed directly.

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  1. James Levy

    The global economy can no longer grow its way out of trouble. There are too many people, too little demand outside the global 1%, too much ecological degradation and sunk costs in obsolete or crumbling infrastructure that the 1% either doesn’t use or isn’t prepared to pay to fix. This means that the mountain of debts has got to be restructured in line with realistic estimates of how much can be paid back and in what executable framework. But the rich people and rich countries want their money–all of it, and now. So expect the whole thing to come crashing down. Question is: do they have the wherewithal to extend and pretend through another cycle the way they did in 2008-9?

  2. joecostello

    Remember the IMF played no role in 08, only Fed had ability to provide dollars needed. The IMF has been revived after the battle to shoot the wounded.

  3. PlutoniumKun

    When I first started paying attention to the IMF – during the 1998 Asian Crisis, I quickly developed a rule of thumb for understanding international economic policy – if the IMF was in favour, the opposite was almost certainly true. Its rarely let me down.

  4. Keith

    Why has QE not been effective?

    Which way is up?

    Does money trickle down or flow upwards?

    In the 19th Century things were still very obvious.

    1) Those at the top were very wealthy
    2) Those lower down lived in grinding poverty, paid just enough to keep them alive to work with as little time off as possible.
    3) Slavery
    4) Child Labour

    Immense wealth at the top with nothing trickling down, just like today.

    No wonder we’ve got problems when economists are trying to work out which way is up.

    We’ve done Neo-Keynesian stimulus.

    After eight years of pumping trillions into the top of the economic pyramid, banks, and waiting for it to trickle down.

    It didn’t work, hardly anything trickled down.

    Try turning it upside down again and see if that helps ………..

    Try Keynesian stimulus.

    Carry out infrastructure projects that create jobs and wages which will be spent into the economy and trickle up (pumping money into the bottom of the economic pyramid).

    If only we had worked out which way was up eight years ago.

  5. Keith

    Jeez ….. the IMF and the World Bank are the last people you want to rely on.

    Look at their track record.

    When South American and African nations were in trouble the World Bank stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

    It was a disaster.

    In the Asian Crisis in 1998 the IMF stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

    It was a disaster.

    When Greece got into trouble recently the IMF stepped in and offered loans as long as they reformed their economy with less public spending, austerity and privatising previously public companies.

    It was a disaster.

  6. Praedor

    Uh…no mention at all about THE biggest problem with the IMF? Their neoliberal insistence of privatizing everything, gutting worker pay and benefits to obtain a loan?

    No country should accept money from the IMF. Doing so requires that they hollow out their own country, feed the 1% handsomely while raping and pillaging the people that actually WORK for a living.

    1. susan the other

      The IMF is going to up its dues from member countries to create a liquidity fund to smooth out the global economy which does not have sufficient growth to service its existing debts. Buying time for now. The IMF probably isn’t so hypocritical as realistic. If a country doesn’t meet the requirements it’s no problem if that country is a bottleneck to world commerce, they get a loan. The IMF is just trying to keep money circulating even though their neoliberal austere mindset is the problem. Like the link yesterday to a Harvard essay on being obsessed with “efficiency”, the IMF kills economies in order to force productivity. Now they are going into their triage and resurrection phase. Rock and a hard place because without enough efficiency there is no capital to invest – in theory. We are probably headed for a flex-security economy – the new French labor scheme – and subsidies for commodity producers globally, supported by the new and improved IMF. What else can they do?

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