College students have mum and dad when the cash runs out mid-semester. Major U.S. banks had Treasury secretary Hank Paulson, his famous bazooka and Federal Reserve chairman Ben Bernanke during the 2008 credit crisis. Even the European Central Bank offered, eventually, to do “whatever it takes” to backstop debt-mired euro zone countries. In all cases, the unconditional and open-ended offer from a lender of last resort helped restore calm to the dorm room, er, financial markets.
But who are emerging-market and resource-exporting countries going to call if the recent mild outflow of foreign investor capital turns into a stampede to the border, and their foreign reserve funds dwindle to but a precious few greenbacks and euros? Why, the International Monetary Fund, of course. The problem is, the IMF’s support is neither unconditional nor open-ended. IMF lending always comes with strings attached.
This shortcoming of the IMF was noted by Harvard economist and international trade expert Gita Gopinath in a World Economic Forum column ahead of this week’s annual IMF meetings. Global economic conditions remain “precarious,” and therefore even a slight shift in monetary policy in the U.S., euro zone or Britain could place severe strains on emerging-market financial markets, she said. What is needed, Ms. Gopinath asserted, is some forward guidance from the IMF as an assurance that all countries have access to a true lender of last resort if a balance-of-payments crisis erupts.
Crisis management has never been a strong suit for the IMF, given the unwieldy and politically charged process a troubled sovereign has to go through to secure funds. An excellent case in point is Greece, where the IMF and the other members of the troika (the ECB and the EU) extracted huge commitments over many months to slash public spending from the troubled nation before funds were released, while investors dangled on tenterhooks and Greek bond yields soared.
Keenly aware of this deficiency, the IMF has in recent years overhauled their crisis lending policies, and now boasts that funds can be made available in just two or three days after a request is made. The devil, as usual, is in the fine print.
At first glance, some of these new policies seem to answer the question of unconditional backstop for any country facing a balance-of-payments problem. A closer look, however, suggests the new programs would not be nimble enough during a full-blown currency crisis.
The IMF’s new crisis lending policy introduced several new credit facilities in recent years. Headlining the marquee are the Flexible Credit Line (FCL) and a Rapid Financing Instrument (RFI). The other lending facilities in the IMF’s crisis alphabet soup, such as the Precautionary and Liquidity Line (PPL) and the Rapid Credit Facility (RFC), are re-hashes of previous lending policies, all of which retain the same need to commit to a full IMF review process before any funds change hands.
All of these lending facilities, even the new and allegedly more flexible ones, come with strings attached. The FCL is a renewable line of credit available exclusively to “very strong performers.” Once approved, the country can access the credit line with no further commitments demanded by the IMF executive – a preferred borrower program, if you will.
There are several catches in the fine print, however. For one thing, the agreement must be in place before any funds are disbursed – and since 2009 only three countries, Poland, Mexico and Colombia, have applied and qualified for the FCL.
It’s not hard to see why so few countries have made the attempt. The IMF has a laundry list of criteria, all of which the country must first meet, including sound public financing, no bank solvency problems, strong financial regulation, a reasonably small (i.e. “sustainable”) current account balance, effective monetary and exchange rate policy, etc. If a country falls short on any one of these criteria, the FCL is not available to them.
The RFI is intended to provide quick short-term access without the need to pre-commit to a full IMF reform program. However, there are only limited funds available and the country “is required to co-operate with the IMF to make efforts to solve its balance-of-payments difficulties and … Prior actions may be required where warranted,” according to the fact sheet on the IMF website. These two stipulations suggest accessing the RFI may not be as rapid as its name implies.
The irony is that the IMF’s new crisis lending facilities seem designed to assist only countries with a low probability of a crisis. Immature financial systems, high inflation, large government and current account deficits are all criteria cited in academia as causing balance-of-payments crises. And none of the countries (India, Malaysia, Brazil and Indonesia) that experienced a surge in capital outflow and sharp currency depreciation last summer would likely qualify for easy access to the IMF’s crisis lending facilities.
Sheryl King is an independent macroeconomic strategist with more than 20 years experience in the international financial industry and central banking.
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