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John Maynard Keynes famously remarked that, “when the facts change, I change my mind. What do you do, sir?” Sadly the same might not be said for the Obama Administration in relation to its unwavering support for a bigger International Monetary Fund. For, despite the progressive weakening over the past three years of the arguments favoring a larger IMF, the U.S. administration continues to badger a reluctant U.S. Congress for an effective doubling in the IMF’s size.
Prior to the outbreak of the European sovereign debt crisis in early 2010, the IMF’s future role as a multilateral lender was in serious question. The IMF’s traditional Latin American clientele had for the most part mended its profligate ways and became increasingly determined not to subject itself again to IMF tutelage. Meanwhile, following IMF overreaching during the Asian crisis of the late 1990s, the Asian countries built up enormous cushions of international reserves. They did so with the express purpose of never again putting themselves in a position where they might be dependent on the tender mercies of the IMF.
And then Europe happened
All of this changed in early 2010 with the onset of the European debt crisis. Against the backdrop of the Great Economic Recession of 2008-2009, it was widely believed in international policymaking circles that the global financial system could ill afford a default in any of the European economies for fear of contagion to the rest of the European periphery. Rather, it was believed that the IMF should join forces with Europe in providing sufficient financial support to fully cover the public borrowing needs of countries like Greece, Ireland, and Portugal. This was to be done for a three-year period or until such time as those countries would have adequately adjusted their economies.
In late 2010, at the Seoul G-20 Summit, it was proposed that the IMF’s resources should be doubled in order to provide the IMF with sufficient firepower to help cover the public borrowing needs of those countries in the European periphery that might be expected to need such support. That proposed increase in IMF resources is yet to materialize mainly because of the U.S. Congress’ reluctance to commit additional U.S. taxpayer resources to supporting the IMF.
The U.S. case
In badgering Congress to authorize an increase in the U.S. contribution to the IMF, the U.S. administration has used three principal lines of argumentation. First, it has maintained that large international lending programs to countries in the European periphery are essential to prevent those countries from defaulting since this could have adverse systemic consequences that a still weak global economy could ill afford. Second, it has argued that the European countries cannot provide this support on their own but need multilateral support from non-European countries through the IMF. Third, the U.S. administration has maintained that increased IMF lending to the European periphery would not place U.S. taxpayers at risk. The trouble with the U.S. administration’s line of reasoning is that the passage of time has undercut each of the arguments supporting a bigger IMF.
Last week, to its credit, the IMF issued a highly self-critical report in which it acknowledged that among the biggest mistakes it made in its massive support program for Greece was to delay the inevitable restructuring of the Greek public debt. Had that restructuring occurred earlier, the IMF would not have required the same degree of fiscal austerity from the Greeks, which was a principal factor in the literal collapse of the Greek economy over the past three years. In addition, had the IMF insisted on an early Greek restructuring, the IMF and the European Union would not have needed to provide financial resources to the Greeks on anything like the scale that they eventually did.
If the argument on the supposed need for large financing programs for the European periphery has not stood up well to the test of time, the argument that as rich and developed an economic bloc as Europe did not have the financial resources to support its member countries on its own has fared even more poorly.
In September 2012, a permanent European Stability Mechanism (ESM) was finally approved with a budget of as much as EUR 500 billion to deal with member countries’ financing problems. More dramatically undercutting the argument that Europe did not have the necessary financial firepower to act alone was the European Central Bank’s commitment in July 2012 to do “whatever it took” to save the euro. This commitment was given substance by an Outright Monetary Transaction (OMT) program under which the ECB undertook to buy as many Italian and Spanish government bonds with maturities of up to three years as needed to keep those countries’ borrowing costs at tolerable level. This commitment was made subject to those countries having an IMF-ESM economic adjustment program.
With the ECB now having undertaken to provide its member countries’ unlimited financial support in their bond markets in the case of need, it would seem that the IMF could quite comfortably revert to its former role as the provider of catalytic financial support for its member countries, including those located in Europe. This appears to be the direction in which the IMF is now moving. In its most recent financial support program with the European Union for Cyprus, the IMF’s financial contribution to the program was but one-tenth of the total as opposed to the one-third that it had contributed in the IMF-EU programs for Greece, Ireland, and Portugal.
In making the case for a bigger IMF, the U.S. administration never fails to reassure Congress that U.S. taxpayer money would not be at risk since in its more than 65 year history the IMF has sustained minimal loan losses. What the administration omits to tell Congress is that the IMF has never before loaned resources on anything like the scale that it is now doing to Greece, Portugal, and Ireland. The IMF’s unprecedented exposure to those countries has to raise the real possibility of IMF loan losses going forward. This would seem to be especially the case when one considers that the IMF itself is now recognizing that Greece might need significant official debt relief by as early as 2014.
When all is said and done, the administration’s case for a larger IMF would seem to be losing credibility with the passage of time. That being the case, Congress would do well to stand its ground in turning a deaf ear to the administration’s incessant pleas for a bigger IMF.
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