Paul O' Neill backs international insolvency law.

U.S. Weighs Aid Boost as Global Slump Worsens

Washington Post

By Paul Blustein

21st September, 2001.

As bad as the economic outlook is in the United States, it's worse in many developing nations, and the Bush administration is talking about stepping up aid to hard-hit countries, particularly those that back Washington's anti-terrorism campaign.

A report released yesterday projected that the flow of private funds to emerging economies is drying up so fast that it will plunge this year to totals not seen in a decade. The report was prepared by the Institute of International Finance, an influential association of the world's biggest banks and securities firms.

The report said flows of private foreign money this year will fall 36 percent, to $106 billion, in the economies of Latin America, Asia, Eastern Europe, the Middle East and Africa, threatening to deprive those economies of funds they need to pay for vital imports, pay debts and finance development.

"The decline reflects heightened risk aversion following the terrorist attacks in the United States on September 11," the report said, "as well as the sharp slowdown in global activity" and financial crises that struck Argentina and Turkey earlier this year.

Other signs abound of the deteriorating outlook, along with ominous harbingers of new crises. Brazil's currency, the real, has fallen nearly 5 percent since the attacks to all-time record lows against the U.S. dollar; the real has lost about 29 percent of its value this year despite a rescue loan for Brazil from the International Monetary Fund. Stock prices in neighboring Argentina, down 16 percent since the attacks, slumped yesterday to the lowest level in a decade.

India, which went largely unscathed during the Asian financial crisis, has been stricken by turmoil in part because of its proximity to Afghanistan. Heavy selling by foreign funds of shares on the Bombay Stock Exchange has driven the nation's benchmark index down 13 percent since Sept. 11.

The flight of foreign money is squeezing such countries at a time when their ability to sell their products abroad was already diminishing because of sluggish demand in the rich markets of the United States, Europe and Japan. Exports from emerging economies will fall 2 percent this year, according to yesterday's report, compared with a 22 percent rise last year.

The falloff of foreign capital, plus the shriveling of exports, is putting pressure on the IMF and other official lenders, such as the World Bank, to provide the funds those countries need.

Treasury Secretary Paul H. O'Neill said yesterday that in the wake of the terrorist attacks, Argentina may need more aid to bolster the $21 billion in IMF loans it has already received. "There may be some additional necessary action" for Buenos Aires, he told the Senate Banking Committee.

The prospect of a rapid increase in loans for countries such as Argentina is a bitter pill for the Treasury, whose top officials have voiced deep skepticism about the long-term effectiveness of IMF and World Bank lending. O'Neill said he is working to find ways of helping Argentina that avoid "huge amounts of additional money."

He said that in the long run, he would favor establishment of an international bankruptcy law, so that countries with excessive debt burdens could work out agreements with foreign creditors to reduce their debts instead of depending on IMF bailouts. Similar proposals have been made in the past but have been discarded because of the vast differences between nations over how to treat debtors and creditors.

Stepped-up IMF loans are also in the works for Pakistan and probably for Turkey. A three-year loan requested by Pakistan was already being considered before the attacks, because its government had fulfilled most of the economic conditions of its current one-year loan. Now delivery of the loan appears all but assured as part of a raft of economic measures the Bush administration is preparing to solidify the regime's backing for U.S. military action across the Pakistani border in Afghanistan.

"Of course the countries that help us are more likely to receive help in return," an administration official said.

Arguing that the gloom may be overdone, Horst Koehler, the IMF's managing director, told reporters this week that while "the downside risks have increased," he still expects a recovery in the United States later this year that will help lift the global economy. Leaked versions of the IMF's forecast have shown that the fund expects global growth in 2001 to be a couple of tenths of a percentage point above 2.5 percent, the level many analysts use to define a world recession.

But the IMF's forecast is substantially biased upward, according to a fund source, because it is based on a calculation in which output in China -- one of the few economies on Earth that is still growing rapidly -- gets an exceptionally heavy weighting. The calculation factors in the high purchasing power of Chinese consumers and, as a result, the IMF's growth projection for world gross domestic product is about a full percentage point higher than it would otherwise be. "This method can be useful, but we shouldn't delude ourselves," said the IMF source.