A Lifeline for Nations Both Rich and Poor
Friday, April 3, 2009
LONDON, April 2 -- The $1.1 trillion pledged by world leaders to combat the worst economic crisis since World War II effectively amounts to a rescue package for both poor and rich countries, potentially including the United States.
The bulk of that money will be channeled through the Washington-based International Monetary Fund, which emerges from the summit with a vastly redefined and enhanced mission. The IMF has long focused almost exclusively on helping developing nations in crisis. As part of Thursday's agreement, it will take the extraordinary step of effectively extending a $250 billion line of credit to boost liquidity in nations hobbled by the credit crunch, with the bulk of the funds going to the industrialized nations of Europe, United States and Japan.
The fact that the United States, for instance, could draw as much as $42.5 billion of those funds to help jump-start domestic lending underscores the breadth of the global plan, which has both short- and long-term fixes for a crisis that has hit nations small and large, wealthy and not.
"In an age where our economies are linked more closely than ever before, the whole world has been touched by this devastating downturn," President Obama said Thursday at the close of the Group of 20 economic summit. "And today, the world's leaders have responded with an unprecedented set of comprehensive and coordinated actions."
Most of the agreement's points revolve around longer-term plans to try to prevent a new crisis by tightening regulation of banks, extending oversight to hedge funds and setting benchmarks on executive pay. But drafting such rules could take months if not years, and they are unlikely to provide any immediate relief from the current downturn. Though new rules could lead to promised global standards for financial institutions, countries still have the right to accept, reject or change them to suit their needs.
The IMF, established at the end of World War II to help restore health to the global economy and currency system, will be transformed into an agency that not only targets nations in crisis but also takes a stronger role in the surveillance of financial systems around the world. It will regularly monitor and report on stresses and faults in countries, theoretically exercising more influence over their actions.
The measures agreed to at the summit that will have the most immediate effect revolve around the pledge for $1.1 trillion in new loans and guarantees.
The majority of those funds is being directed at emerging and poor countries hit hard by the global crisis. Leading nations -- including, for the first time, China -- agreed to contribute vast amounts of money that would triple the IMF's lending power to $750 billion to bolster its ability to bail out nations in crisis. The IMF has been shelling out money at an alarming rate since the crisis accelerated in September, particularly to nations in Eastern Europe.
The fresh injection of funds gives the IMF what its managing director, Dominique Strauss-Kahn, on Thursday called the "firepower" it needs to deal with the crisis. It would provide the fund with enough cash to stage far larger bailouts, including large-scale aid to industrialized nations in Western Europe if they need it. Japan and the European Union have pledged to boost funding by $100 billion each. U.S. Treasury Secretary Timothy F. Geithner has said he will ask Congress for $100 billion. Other nations, including Russia, have also signaled a willingness to add to the pot. That money, however, would be held in reserve and only spent if needed. "The IMF is back," Strauss-Kahn proudly proclaimed Thursday.
Some of those funds will go toward a new type of IMF loan for nations hurting from the credit crunch but not yet in crisis or near collapse. Such lines of credit will be offered without the traditional IMF conditions of slashing spending and implementing highly conservative monetary policy that has long exasperated developing nations.
Mexico has already announced that it would seek these funds in a move heralded as symbolically important because it will ease the stigma of others seeking funding.
Alistair Darling, Britain's chancellor of the exchequer, said Mexico's use of the fund signals that "it makes sense for the IMF trying to intervene earlier and to help countries, provide them with support, and it doesn't necessarily mean there's any sign of any immediate problem." It may encourage developed nations, such as hard-hit Ireland and Turkey, to pursue help.
"Rich countries are not immune to this crisis," said Richard Portes, an economics professor at the London Business School. He said the windfall for the IMF is "big bucks, at the top end of what people were hoping for. This is big bucks, a major step forward."
It also marked what some here are calling a turning point for U.S. economic influence. Rather than in U.S. dollars, for instance, the $250 billion credit from the IMF to be offered to countries including rich nations is coming in the form of the Fund's own independent "currency" known as Special Drawing Rights.
Nations including the United States will be allocated a portion of those SDRs, which will be held in reserve by the IMF but could be converted into tradeable currencies such as the dollar, yen or euro if withdrawn.
Chinese and Russians have called for the IMF's currency to eventually replace the U.S. dollar as the basis for reserves in central banks worldwide. Though a proposal to discuss such a switch was sidelined by the United States and other nations this week, the IMF plan nevertheless marked a first small step in that direction, analysts said.
"I'm sure the Chinese are pleased," Portes said.