While the IMF has given the green light to new crisis lending windows, critics argue that it should focus instead on other ways of preventing crises.
The G20 asked the IMF to review its crisis lending toolkit in November 2009. In August the IMF board finally accepted the proposal to create a Precautionary Credit Line (PCL). The new PCL fits in between the IMF’s Flexible Credit Line (FCL), a conditionality-free facility launched during the financial crisis (see Update 65), and the Fund’s standard lending window for middle-income countries, the Stand-by Arrangement (SBA).
Whereas the FCL allowed eligible countries to access resources without specific reform commitments, it was only available to members that the Fund already thought had good policies and did not need significant reform. The PCL, in contrast, will be available to countries “with sound policies, that may not yet meet the high FCL qualification standards, but do not require the same large-scale policy adjustment normally associated with traditional IMF arrangements.”
Borrowers can access large amounts of money through the PCL, up to 1,000 per cent of quota over two years, but will have to abide by IMF conditions. Those conditions will not be as extensive as those on an SBA, but will be focussed on the policy areas where the country is judged by the IMF to be the weakest. The PCL is designed to be a precautionary arrangement to help prevent markets from withdrawing capital from countries, rather than a loan when a country has urgent need of cash. This type of facility had failed to attract interest from any countries before the advent of the FCL (see Update 54).
At the same time the board also modified the FCL, doubling the possible duration of access to two years, and removing the implicit access limit of 1,000 per cent of quota.
Simon Johnson, professor at Massachusetts Institute of Technology and former chief economist of the IMF, was derisory about these new mechanisms, saying that for European countries facing sovereign debt crises (see Update 72) they would only exacerbate the likelihood of insolvency while bailing out the private banks that lent money to those countries. He argues that “the IMF, which should be standing up to this dangerous bargain, instead plans to open the spigots even more widely to insolvent nations” and concludes that these countries are “likely insolvent” and need debt restructuring instead.
Global (un)safety nets
The PCL is only the first leg of reform, as the IMF has been working with G20 chair Korea to fashion a consensus on a new global safety net designed to prevent financial crises should there be another global economic downturn. The proposals are the final piece of the IMF mandate review (see Update 70) and are expected to be finally agreed at the G20 summit in Korea in November. The G20’s global financial safety nets expert group, jointly chaired by the UK and Korea, has been working on the proposals, which are expected to be a follow-up to the the ideas of multi-country swap lines and IMF financial support to regional monetary funds (see Update 71, 70).
Former chief economist of UN Conference on Trade and Development Yilmaz Akyüz had a fundamental objection: “After almost every major financial crisis the IMF seeks a new role. This is almost always construed in terms of expansion of its crisis lending capacity. But the IMF’s main business is the prevention of instability and crises, not crisis financing. It has so far missed, not just failed to prevent, every major crisis of its lifetime.”
Akyüz went on to argue that, in those cases where crises happen, “it would be better to respond to them by combining mandatory debt work out mechanisms, including temporary debt standstills and exchange controls, with emergency lending rather than to keep on bailing out international creditors and investors with attendant consequences for burden sharing, moral hazard and financial stability.”