As IMF stumps for funds, a Republican backlash brews over Europe
By Howard Schneider,
In the wake of the 2008 financial crisis, the Obama administration helped negotiate a plan to give emerging economic powers increased say at the International Monetary Fund, while also having them contribute more to an enlarged pot of money for the fund.
But a brewing election year fight with congressional Republicans has put that plan in doubt and could restrict the IMF’s finances at a time when agency officials say they need a substantial boost to protect the world economy.
The dispute centers on Republican opposition to increasing the United States’ financial contributions to the agency, reflecting anger over IMF rescue programs in Europe that some GOP lawmakers argue have become too expensive and have put U.S. taxpayers at risk.
The cost to the United States of the European rescue programs is debatable. Some of the money provided to the IMF is in the form of loans on which the United States earns interest.
Still, opposition is growing to a permanent increase in U.S. government support for the IMF, as well as to a $100 billion credit line the United States provided in 2009 as part of an international move to help the IMF respond to the global financial crisis.
The IMF has been dipping into that credit line for emergency loans to Portugal and elsewhere, and opponents have taken note.
“I worry that the size of the IMF’s loans and the difficulty of ensuring adequate reform among countries participating in the IMF’s lending arrangements only increases the risk of default,” Rep. Cathy McMorris Rodgers (R-Wash.) said in a letter Tuesday to Treasury Secretary Timothy F. Geithner.
“I would like to hear them make the case,” that a quota increase is needed, Rodgers said in an interview, citing her concerns about the U.S. debt. “The idea that we are borrowing . . . to help fund the European bailouts raises a lot of questions.”
Emergency programs in Greece, Portugal and Ireland are among the IMF’s largest ever, and the concentration of lending in one region — particularly a wealthy one such as Europe — has been controversial within the agency itself.
Administration officials, trying to navigate the nation’s own deficit problems and the politics of an election year, has yet to say when they plan to send needed legislation to Congress. Planned changes at the IMF, which would shift seats on the fund’s governing board from Europe to the developing world, cannot proceed without congressional approval. For practical purposes, neither can a related doubling, from $370 billion to $740 billion, in the total permanent contribution that IMF members make to support the agency.
The individual contribution, or quota, assigned to each country is linked to its economic size and determine its voting clout in the fund. The current U.S. quota is $65 billion, the largest of any IMF member and enough to give it an effective veto over some major issues.
“We are still assessing our legislative options and have not yet decided when to submit legislation,” said a Treasury official, who was not authorized to speak for the record.
The potential for a stalemate over the issue in the United States has the IMF and other international officials worried that it could put broader agency reform efforts at risk.
IMF officials say that to backstop the global economy they need about $500 billion in addition to the increase in permanent contributions.
IMF officials had hoped the permanent increase would be approved at the fund’s annual meetings this fall.
The uncertainty over U.S. approval is “messing with an institution you need to believe in,” said Lourdes Aranda, Mexican vice minister of foreign affairs. Mexico chairs the Group of 20 top economic powers, and Aranda is coordinating the organization’s upcoming meetings. Support for the IMF looks to be a central issue at the meetings.
Aranda, in an interview in Washington this week, said it was important for the IMF to build a large base of “firepower,” partly because it has become more flexible in how its funds are deployed.
Some of its newer programs, for example, help countries by setting up credit lines, with Mexico a case in point. No money has changed hands, “but for our markets, just knowing the credit line is there is important,” Aranda said.
In fact, much of the justification given for the IMF’s fundraising drive is precautionary: the bigger the pool of money available to fight a crisis, IMF officials argue, the less markets are likely to worry about or cause financial “contagion,” and the less likely the money itself gets used.
Still, when a credit line or other precautionary program is established, the money has to be available and set aside on the fund’s books so it is ready if needed.
The IMF has about $400 billion in uncommitted funds, though much of that is through the bilateral credit lines set up by the United States and other countries in response to the financial crisis. The money available from quotas — essentially the fund’s membership dues and a core part of its legitimacy as an international institution — has basically been exhausted.