Congress has been asked to stump up $18bn more for the coffers
WHEN A BANK runs out of money to lend, it represents a crisis for borrowers. When a central bank runs out of money, that is more serious still; it is a crisis for a nation, and anybody else who is financially exposed to that country. But what happens when the central bankers' central bank runs out of cash?
That is precisely what seems to be happening to the International Monetary Fund. After rescue packages for Indonesia, Korea, and Russia, it is running short of cash, and plans to boost its resources have run into heavy opposition from the richest and politically most influential member: the US.
Elsewhere doubts are being expressed about whether the cash is being well spent. German Finance Minister Theo Waigel said yesterday it was not possible for the IMF or anyone else to fix Russia's problems. It was up to the Russian government to take action.
For Michel Camdessus, IMF Managing Director, the stakes could hardly be higher. Questions are being asked about the value of the institution - and its member governments, particularly the US and Germany, are under political pressure to rethink their attitude.
As Mr Camdessus sets out for crucial meetings with Russia and Ukraine, the Fund's available assets are at an historic low point. Next month the IMF's annual conference looks set to be a fiery event...
It is ridiculously difficult to try to calculate the IMF's financial position. "It is not possible in a timely manner to determine from publicly available resources what resources IMF has available for operations," Harold Johnson, an official at America's General Accounting Office told Congress last month, and he should know, because he has produced the best available estimate.
Mr Johnson calculates that the IMF has a total of about $195bn in currency holdings provided by quota subscriptions from its 182 members. Of these, however, a significant chunk comes from countries whose currencies are not strong enough to allow their currencies to be used for lending, leaving about $130bn. Of that, about $70bn has already been used for credit arrangements, and a further $17bn is committed, leaving $43bn for operations.
That sum must in turn be adjusted to take account of necessary reserves - which is where the real theology comes in.
The IMF retains reserves to allow for liquidity in its foreign exchange transactions, as a precaution against strong currencies suddenly becoming weak currencies, and to permit countries with strong currencies to draw on their quotas if they need to. According to two different formulae, that left anything between $8bn and $31bn available to the IMF at the end of July; after the last Russian bailout, the sum available was even less.
Comments from officials at the Fund and the US Treasury indicate that the figure is well toward the bottom end of this scale, at about $10bn. As the old saying goes in Washington, a billion here, a billion there and pretty soon you're talking real money; but $10bn is, in terms of the crisis faced by Russia and the potential needs of other nations, a drop in the ocean. After all, Russia unloaded over $4bn in a few days in defence of its currency.
"We are in grave difficulties," said Stanley Fischer, the first deputy Managing Director, last month. "After these loans, the liquidity ratio is below the number we feel comfortable with." It has gone below 30 per cent, the lowest since the late 70s.
There are other ways that the IMF can find money, and it has already started using them. Last month it touched the General Arrangement to Borrow, a reserve tank, to finance its Russian package, the first time it has been used since the 70s when it helped prop up Britain, Italy and (ironically) the US.
It could sell off gold reserves, or touch some of its more affluent members for extra loans. The IMF has been passing the hat around and had expected to have more cash coming in, but this particular cheque is still in the post. To kick off its New Arrangement to Borrow, it needs the approval of, above all, the US; and that's where the trouble gets worse.
The US is the predominant political player in the Fund; and because so many of the members have currencies that cannot be used internationally, it has a disproportionate financial stake as well. The US share of the IMF's usable resources is over 25 per cent. The White House has asked Congress to stump up an extra $18bn-$14.5bn of it to add to its quota, and $3.5bn for the NAB. But though the Senate has approved the cash, the House of Representatives is resisting.
Partly, this is scepticism about just how much the Fund needs new cash. "The alleged impoverishment of the IMF is more than a bit exaggerated," says Jim Saxton, the Republican Congressman who chairs the Joint Economic Committee.
With the Fund so notoriously reticent about its own affairs, and suspicion of international organisations in the US deeply rooted, he has struck a chord. The $8bn figure has been widely bandied, but Mr Fischer used the higher $31bn figure last month, confusing the IMF's case further. Anyway, Mr Saxton says, the IMF could start commercial borrowing, like anybody else.
A more fundamentalcriticism of the Fund is at large in Washington. The Russian package, for instance, went from the coffers of the IMF, to Moscow, and virtually directly back to Western banks who were speculating against the rouble and Russian bonds. Now, it is those very same banks who are worried that Russia will slip down the toilet, leaving them further exposed. Equally, Russia took the money from the IMF but has failed to deliver on the kinds of fundamental reform which critics believe would restore confidence. The IMF is accused of promoting moral hazard by inviting reckless behaviour.Reuse content