By Steven Pearlstein
Washington Post Staff Writer
Wednesday, January 28, 1998; Page C09

Later this week, Congress will take up President Clinton's controversial request for $18 billion in new funding for the International Monetary Fund, the world's lender of last resort, which mounted a $100 billion rescue for the ailing economies of Asia.

To its critics, the IMF has routinely missed the signs of brewing trouble in developing economies, only to rush in belatedly with assistance packages that impose too much suffering on those countries while bailing out foreign lenders and investors.

But to its officials and defenders, the IMF, for all its flaws, is the only institution that can rein in the excesses of financial markets and keep the global economy from falling into a dangerous depression.

Below is a layman's guide for sorting through these arguments, gleaned from conversations with bankers, economists and government officials.

Q: Big banks and foreign borrowers don't share their profits when things go well. So why should American and other taxpayers bail them out when things go badly?

A: There may or may not be that kind of bailout involved here. It is certainly true that if the IMF didn't step in with its money, U.S., Japanese and European banks would lose some or all of the billions they have lent to Asian banks and corporations. In that sense, lenders are certainly being shielded from the full consequences of their imprudent decisions. So, too, are the borrowers, who without IMF aid would be forced to default on their loans and give up the prospect of getting any new ones for years to come.

On the other hand, it's not true that the IMF money is being used by Asian governments to directly pay off bank loans -- at least not yet. As part of the South Korean negotiations, for example, the big banks have agreed, under heavy pressure from the U.S. government, not only to keep their money in Asia for the next several years but also to increase their lending.

Q: But if these countries are broke, what good does it do to extend loans or guarantee them?

A: These countries may not be broke, at least in the sense most people use that word. Rather, they may have gotten themselves into a temporary cash bind by taking out too many short-term loans that they cannot immediately repay -- at least not if all the lenders decide they want to be repaid all at once, which is what happened.

Q: So if they aren't really broke, why do they need IMF aid at all?

A: The IMF aid is primarily there to convince the remaining lenders and investors that there's enough money on hand so they don't have to pull out to protect themselves. In the best case, currency prices stabilize, investors return, economies rebound and -- voila -- banks and corporations get back to earning enough money to pay off their foreign loans.

Q: And how likely is it that it works out that neatly?

A: Very likely, say U.S. and IMF officials. They point out that these were fundamentally sound economies before the crisis. Now they are primarily suffering from the ill effects of a panicked and irrational retreat by foreign lenders and investors that has driven the value of Asian currencies to ridiculously low levels.

Q: So what's the hitch?

A: The hitch is that they may be wrong. Other economists believe that these Asian countries suffer from more than a temporary cash shortage; in fact, they may have taken on too much debt. For a decade, that excess borrowing over-inflated the value of land and corporate stock and the value of their currencies. And now that the bubble has burst and these prices are returning to more reasonable levels, it may be that banks and corporations will never be able to generate enough dollars or yen to pay back these loans in full.

Q: What would happen then?

A: The IMF money would get drained away, and before long these countries would be back looking for another loan from the IMF.

Q: So maybe the better solution is for these countries to bite the bullet now, declare they are in default and let everyone take their lumps.

A: That's what die-hard free-market types propose. But U.S. and IMF officials argue that, at the minimum, such a strategy will cause the Asian recession to be longer and deeper, with dampening effects on the U.S. economy. They also warn, ominously, that prolonged economic suffering could lead to political unrest and ethnic violence in the region. The biggest risk, however, would be that the crisis of confidence spreads to other developing countries in central Asia, Latin America and Eastern Europe, triggering a global depression.

Q: That's a pretty stark choice -- either to rescue the banks and their Asian borrowers or risk a 1930s-style depression. Isn't there some middle ground in which IMF aid is provided, but only after bankers and borrowers agree to take a hit?

A: That's what Treasury and Federal Reserve officials are trying to work out behind the scenes, arguing that it would set a better precedent and help mollify critics of the IMF in Congress.

Q: Putting aside the banks and the risk of a global financial meltdown, why should Americans want to rescue economies of countries that have been stealing American manufacturing jobs for years?

A: Jobs probably aren't the issue: While thousands of Americans have lost jobs because of imports from Asia, economists say roughly equal numbers of Americans have gained jobs in export industries. But many economists acknowledge that this increase in trade with Asia has probably contributed to the widening pay gap between low-skilled workers and those with college degrees.

Q: And now the administration wants those low-skilled workers to send more of their tax money to the IMF?

A: Not exactly. U.S. contributions to the IMF don't really come from tax money -- they are really loans of dollars and foreign currencies now held in reserve at the Fed. They don't add to the deficit or subtract from the surplus or drain money from other programs. Once Congress approves an increase in the IMF contribution, the Fed deposits the money with the IMF, making it available for the IMF to loan it to Asian central banks.

Q: And what guarantees are there that all those loans will be repaid?

A: Although there are no guarantees, very few countries have ever stiffed the IMF. As a result, in its 50 years of existence, the IMF has not cost the United States a dime.