IMF Plans Aid for Emerging Economies
Friday, October 24, 2008
Alarmed by a fast-ballooning crisis in emerging markets, the International Monetary Fund is close to creating an emergency program to rush hard currency to nations suddenly teetering on the verge of default, IMF sources said yesterday.
Dozens of countries in Eastern Europe, Asia and Latin America that experienced record periods of growth in recent years face serious threats to their economies. Foreign investors hit by the crisis that started in the United States are rushing to pull out their cash to cover bad bets at home. That has sent waves through once-thriving emerging markets, sparking stock sell-offs and runs on currencies from Budapest to Sao Paulo.
Now, fears are mounting that some developing countries might default on their foreign bonds, potentially adding a full-blown debt crisis to the financial turmoil gripping the globe.
To aid those nations, the IMF is considering establishing a pool of money that nations in jeopardy could quickly access for loans, according to a draft of the proposal. The fund's board is expected to vote on the proposal next week; it was unclear yesterday how much money could be made available.
In contrast to the longer-term assistance programs the fund is negotiating with countries including Hungary, Iceland, Belarus, Ukraine and Pakistan, the new loans would be short-term and have fewer requirements for approval, said sources who spoke on the condition of anonymity because they were not authorized to speak about the program, which has not been announced.
The program, which would be a short-term liquidity facility, is designed to bolster bleeding confidence in emerging markets and work in a manner similar to arrangements the Federal Reserve has with major central banks in Europe and Japan. As the credit crunch has made dollars scarce, those arrangements, known as currency swaps, have provided a lifeline of dollars -- the currency in which international transactions are mostly settled -- to the central banks of wealthy nations. Those banks then distribute the dollars to their domestic financial institutions. In exchange, foreign central banks offer collateral of euros, yen and pounds as loan guarantees.
Central banks in developing countries have not had the luxury of currency swaps, largely because they are seen as riskier borrowers.
Reports circulating in London and New York yesterday indicated that a new program would include as much as $1 trillion from a collection of institutions including the IMF, Federal Reserve and central banks in Europe and Japan. In response to the rumors, IMF officials said that the figures being discussed would not approach $1 trillion, and that, as of now, only the IMF would be involved. Analysts have said that bringing the United States, Europe and Japan into such a program might prove difficult, both politically and financially, given the hundreds of billions they are spending to defend their own financial systems.
The new program would mark the latest attempt by the IMF to close serious cracks forming in emerging markets. While smaller economies are facing major crises, even giants like China, Brazil, Russia and India are experiencing potentially painful slowdowns.
The IMF, which is both an adviser and lender for countries in need, typically engages in loan programs of three to five years. Borrowing nations generally must meet tough requirements on fiscal spending and economic policy, a humbling experience that has lead many in the developing world to view IMF loan programs with disdain.
The IMF recently enacted emergency measures that allow it to approve those agreements more rapidly and with fewer conditions. But the short-term loan program is envisioned as making fast cash even more accessible, potentially benefiting both emerging markets and the IMF. The fund, experts say, has attempted to offer shorter-term loans in the past without success. But global conditions for financing are so tight that the idea may prove more successful now.
A pool of short-term cash lent with even fewer restrictions could encourage more countries with structurally sound economies that have been battered by the global credit crunch to seek help. "There may be some countries like Brazil that could face a temporary problem with short-term credit, but don't want or need a full IMF program," said Michael Mussa, former IMF chief economist and a senior fellow at the Peterson Institute for International Economics. "The idea is that this is a softer facility, one that may not carry the same stigma."
It could also calm investors, reassuring them that the developing countries they are doing business with have a new option for short-term financing. That may lessen the need for larger and longer-term loans. Though analysts say the IMF is relatively flush, with at least $200 billion on hand for lending, the number of developing nations seeking help is the largest since a series of debt and currency crises struck Asia and Latin America in the late 1990s and early 2000s. More countries, including relatively large economies such as Turkey's, are asking for stand-by agreements that could result in a rapid disbursement of a large amount of money in emergencies.
The interest on short-term loans could provide a windfall for the IMF, assuming they are paid back on time. But experts said the measure could meet opposition from some members of the IMF's international board, particularly from countries like the United States and Germany that have pushed the fund to remain conservative in its lending practices.
"This is dough that donors could potentially lose if it's not paid back, so it's going to be interesting to see if the board buys into this," said Simon Johnson, a former chief economist at the IMF and professor of economics at the Massachusetts Institute of Technology.