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| Stopping the Bailout Buck Here: O'Neill Taking A Tough Stance On IMF Loans To Countries 5
June 2001 Profligate governments abroad had better beware, and the same goes for reckless international lenders and investors. No longer can they count on getting bailed out when financial crises strike. That, at least, is the implication of the posture taken by Treasury Secretary Paul H. O'Neill. He recently chided his Clinton administration predecessors for their "too frequent" international rescues of crisis-stricken countries, and O'Neill's newly confirmed undersecretary for international affairs, John Taylor, once advocated abolishing the International Monetary Fund. But tough deeds don't always match tough rhetoric when the stability of important countries is at stake. In the two major financial crises the Bush administration has faced so far -- in Turkey and in Argentina -- the administration has shown little stomach for letting countries go broke or making investors suffer drastic consequences for bets gone wrong. The United States, which is the dominant member of the 183-nation IMF, backed $8 billion in IMF loans for Turkey in late April on top of an existing $11 billion loan package. Moreover, in both Turkey and Argentina, Washington has tacitly given its blessing to rescue strategies that stop short of making financial market players accept reduced paybacks on their loans and investments. All of that goes to show, according to Michael Dooley, a former IMF economist who now teaches at the University of California at Santa Cruz, that "everyone talks about how they're going to let countries twist in the wind, but when people actually get into those jobs, they don't have a lot of choice except to intervene and help the countries out." O'Neill has been doing his best to suggest that U.S. policy concerning international rescues will be different under his leadership than it was when his Clinton administration predecessors, Robert E. Rubin and Lawrence H. Summers, were mobilizing multibillion-dollar loan packages for Asian countries, Russia and Brazil. In recent congressional testimony, he complained that the IMF has been "too often associated with failure," in part because its giant loans frequently end up being used by countries to pay debts owed to high-rolling financiers. "If a [private] lender freely goes into a country situation where the risks are very high," the Treasury chief said, "we need to figure out a way to let people who take those very high risks suffer the consequences . . . and not be there, in effect, to underwrite their situation with the people's money." So why support an "augmentation" in the IMF loan to Turkey? In the first place, administration officials say, they inherited a mess with few palatable options. An $11 billion IMF rescue approved in November flopped in February when severe market turbulence forced Ankara to abandon the fixed exchange rate for its currency, the lira. The plunge in the lira's value threatened to reignite hyperinflation and foment instability in a country of enormous strategic importance in the Middle East. When it came time to negotiate the terms of the new rescue plan, O'Neill took a hard line on some issues. Although the IMF and Washington's European allies pushed hard for major industrialized countries to contribute bilateral loans to the Turkish package, "Secretary O'Neill was quite insistent that there not be bilateral support," said Taylor, who took office as undersecretary for international affairs last week. "That was important: It was a statement of limits." But the result was that the IMF's loan was larger than it would have been otherwise, and many experts scoff at the administration's contention that refusing bilateral aid constitutes a major change in U.S. policy. "All the bragging by people in the administration about how there's no bilateral money masks the fact that they've been willing to go with the fund offering a very large program," said Peter Kenen, an international economist at Princeton University, who called that decision "inconsistent" with the administration's professed desire to discourage markets from relying on bailouts. In another respect -- the conditions imposed on the Turkish government for receiving the loan -- O'Neill also hung tough, according to the Treasury. He insisted that before the IMF disbursed more money the Turkish government would have to demonstrate its ability to reform the corruption-riddled economy by enacting several politically sensitive bills. But it is hardly unprecedented for the IMF to demand that countries implement reforms before receiving loans. And although private economists have high regard for Turkey's economics minister, Kemal Dervis, a former World Bank official, they say he faces enormous odds, noting that Turkey's government debt is projected to soar to an estimated 90 percent of gross domestic product because of the cost of cleaning up the banking system. The rescue plan would stand a greater chance of working, said Morris Goldstein, a former IMF official who is now with the Institute for International Economics, if it had included a proviso that Turkey's private creditors agree to reduce their claims, to make the country's debt burden more sustainable. "O'Neill says he wants success stories," Goldstein said. "Turkey could work out, but you're shooting from way behind the half-court line on this one. If you're going to be backing successes, you've got to shoot closer to the basket." Similar arguments pertain to Argentina, where the IMF recently resumed disbursing a $13 billion loan in support of the program advanced by Economy Minister Domingo Cavallo, who was recruited in March by President Fernando de la Rua to revitalize the faltering economy. Cavallo is staking the country's economic future on a just-completed deal in which banks and other financial institutions agreed to swap nearly $30 billion in short-term bonds for longer-term bonds maturing in 2006-31. The idea is to give the government a breathing space by deferring debt-service costs while the country adopts policies aimed at spurring competitiveness and growth. But to induce the bondholders to accept the deal, the government had to offer yields above 15 percent on the long-term bonds, and skepticism abounds that the country has achieved much more than a postponement of the day when it will have to tell its creditors that they must simply accept a cutback in the $130 billion they are owed. Goldstein, along with a number of other analysts, contends that Argentina would be better off confronting its creditors now. "No one wants to recommend that sort of thing lightly," Goldstein said. "There will be all kinds of fallout in markets. But look at the debt profile of [Turkey and Argentina]. These are real long shots." Aside from its stance on individual cases such as Turkey and Argentina, the administration has a chance to put a major stamp on IMF policy using a different route -- appointments to senior Fund positions. The IMF's principal deputy managing director, Stanley Fischer, recently announced his intention to leave, as did Michael Mussa, the chief economist, and Jack Boorman, the director of the powerful Policy Development and Review Department. All are Americans. |
