Aiding banks or people?

15 January 1998

The IMF‘s interventions have again raised discussions of who bears the burden of financial crises. A December report by the Institute for International Finance found that financiers returned to their old lending habits following the IMF‘s bailout of the Mexican economy in 1994. This suggests that financiers may ignore certain risk factors because they assume they will be bailed out in the event of an emergency. Analysts are arguing that the IMF must do more to prevent crises, in particular, by imposing more discipline on creditors and reducing the bailout they receive. Some commentators have again suggested a Tobin Tax on speculative capital flows. Financier George Soros however, argues that the IMF is preserving an international lending system that is “fundamentally flawed”. He argues that the private sector is ill-suited to allocate international credit because it provides either too little or too much; it has insufficient information to form balanced judgements; its goals are to maximise profits and minimise risks, not maintain macroeconomic balance, and therefore it moves in a herd-like fashion. He is calling for the establishment of an International Credit Insurance Corporation*, as a sister institution to the IMF, to supervise international capital movements and regulate credit to achieve macroeconomic balance. It would ensure that burdens are shared more fairly by guaranteeing international loans for a modest fee, with some limit set on the amounts it would insure. Beyond these amounts creditors would not be insured and would be expected to bear all risks themselves.

* For more details see: Financial Times, 31/12/97.