Mexican crisis means a new role for the IMF

An emergency financing mechanism and `sharper policy advice' are the G7 prescription. Paul Wallace reports
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The Independent Online
Halifax, Nova Scotia - The agenda for the G7 summit had always included a review of the role of international financial institutions like the International Monetary Fund, now enjoying its 50th birthday. In the event, the run on Mexico dramatically highlighted the incapacity of the IMF to mount a swift response to a financial crisis that threatened to ripple out and become systemic.

From this object lesson in how not to conduct a bail-out flowed the most substantive set of recommendations to emerge from the summit. The IMF will now set up an "emergency financing mechanism" to enable it to provide prompter access to standby credits in future financial crises.

The emergency funds will come from a doubling in the resources made available to the IMF under the General Arrangements to Borrow (GAB). These are agreements under which the IMF may borrow specified amounts, currently totalling US$27 billion, from a number of countries.

Since the early 1980s, participants in the GAB have been the Group of Ten countries, which is in practice 11 - the G7, Belgium, Netherlands, Sweden, Switzerland - together with Saudi Arabia. However, it emerged that the G7 is now seeking to widen the net to include possibly as many as 30 cash-rich nations in the developing world. British officials cited Singapore and Thailand as possible candidates. Singapore is estimated to have foreign exchange reserves of US$87 billion.

But, as summiteers so sagely observed, prevention is the best cure. To that end, the IMF's surveillance remit is to be extended. The G7 wants the IMF to provide "sharper policy advice" and deliver "franker messages to countries that appear to be avoiding necessary actions".

The IMF thus emerges from the Halifax review with a significant new role. Not before time, some critics will say. The Bretton Woods system of fixed exchange rates under which the IMF provided bridging balance of payments funds, conditional on better economic policies, has long gone. Since the mid-1970s, the IMF has increasingly been drawn into helping out developing countries with what has become longer-term financing, thus trespassing on the territory of the World Bank.

The IMF's new role is already under attack. The big worry is that the readiness to bail out countries such as Mexico will lead to further crises by creating "moral hazard" on the part of foreign investors. The bail- out was not so much of Mexico, but of Wall Street investors who had bought the "emerging market" story. For that reason, there are many who say the IMF should organise "orderly debt work-outs" - in effect, to preside over international bankruptcy proceedings.

Summit leaders called for an investigation of this general approach. The G7 leaders urged a review by Group of Ten Ministers and governors of "other procedures" that could be deployed in the "orderly resolution" of "debt crisis situations". But it recognised "the complex legal and other issues" that would be involved - summit-speak for what may arguably be insurmountable legal difficulties.

Despite the new responsibilities G7 leaders recommend for the IMF, the final communique fell far short of what the Fund's managing director, Michel Camdessus, had demanded. In a speech in Canada before the summit, he urged the doubling in member states' quotas, their capital subscriptions. He said the quota review should be completed by the end of 1996.

However, all the summit could recommend was "continued discussions on a new IMF quota review". G7 leaders want the IMF to do more - but they are unprepared to foot the bill.

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