FT.com / World bank & IMF 2002 annual meeting
IMF lends too much, too long says monitor
By Alan Beattie in Washington
Published: September 25 2002 22:04 | Last Updated: September 25 2002
22:04
The International Monetary Fund lends too much for too long to delinquent countries, often for political reasons,
according to the first report from the fund’s new independent watchdog. The independent evaluation office led by
Montek Singh Ahluwalia, a former Indian government official, on Wednesday said the IMF should consider
stricter controls on lending to repeat borrowers, and more divisions between its surveillance and lending
operations. The report marks official acknowledgment of common criticisms that the fund finds it hard to break a
culture of lending to countries with deep-seated structural problems. “Prolonged use [of loans], even when it takes
place for ‘good’ reasons, can have significant adverse implications both for prolonged users and for the IMF,” it
said.
The report, published on Wednesday, said the IMF’s increasing tendency to lend under multiple programmes over
long periods - which is contrary to its stated mission of short-term stabilisation - was partly a reflection of pressure
from shareholder governments. In particular, demands for the fund to lend to very poor countries on low interest
terms have increased: 29 of the 44 repeat borrower governments between 1971-2000 were eligible for the fund’s
soft loans. But prolonged lending, which made up half the IMF’s outstanding loans last year, often failed to
achieve its desired objectives and put the institution’s credibility at risk. Case studies of several repeat borrowing
countries, including Pakistan, the Philippines, Senegal and Jamaica, “suggest that political considerations have
been an important factor” the report said. It made 22 suggestions for reducing repeat lending including explicit
“exit strategies”, higher loan charges for individual countries and more assessment of why programmes had failed.
The report’s suggestion of greater separation of the IMF’s surveillance and lending functions echoes a call earlier
this year by Gordon Brown, UK chancellor, who chairs the fund’s ministerial steering committee. But the UK
proposal has failed to gain support in the bank’s executive board, with other large countries, including the US and
France, opposed.
An IMF staff response to the report said it agreed with many of the report’s conclusions, including the need to
reduce long-term lending, and that the spirit of several of the recommendations was already in place. But it said
that the report’s choice of case studies was unrepresentative and some of its recommendations - including charging
repeat borrowers more - had already been considered and rejected. “The report glosses over the difficulty of
achieving and sustaining national ownership of sound macroeconomic and structural adjustment policies,” it said.
Global economy woes test IMF’s faith
By Alan Beattie
Published: September 25 2002 21:57 | Last Updated: September 25 2002
21:57
Times like these are a test of faith for the high priests of globalisation.
The world economic recovery is sputtering. Ebbing capital flows and sinking export prices are exposing the
vulnerability of poor countries, especially those staggering under heavy burdens of external debt. And the
corporate scandals in the US have put capitalism on trial at its global heart. These concerns will come to the fore
at this week’s meetings of the International Monetary Fund and the World Bank. And even for the IMF’s most
senior officials, there are concerns about the durability of the globalisation project unless it receives more balanced
and consistent support.
Speaking to the Financial Times, Horst Köhler, the IMF’s managing director, voiced his frustration with trying to
keep the globalisation project on track against its many critics. “We have a big debate with NGOs. . . but also with
political parties who say it has to change,” he said. “This makes me concerned [that] too many people are talking
about its problems. The main point, that [trade] integration is good, too often goes into the background.” Mr
Köhler, two years into his tenure, has developed a philosophy of “self-responsibility”: encouraging developing
countries to take the risk of opening trade and liberalising their economies for the promise of help if they get into
trouble for reasons beyond their control.
And the IMF has put its money where its mouth is. Defying talk that the era of huge bailouts is over, and criticisms
that its problems were partly of its own making, Mr Köhler has taken his own risk: a spectacular $30bn (£19bn)
bailout for Brazil. The bailout has symbolic significance beyond Brazil’s pivotal role in Latin America and its
importance to the global economy. If it fails, the incentive for other countries to play the game by the IMF’s rules
will be diminished.
Mr Köhler and his deputy, Anne Krueger, insist that the experience of Latin American countries such as Brazil,
Mexico and Chile shows the benefits of integrating into the global economy. They also say that Brazil’s rescue
package was given on merit. But it is clear that there is also a demonstration effect. “We need to demonstrate that
a country that has improved can rely on rapid and even generous support from the international community,” Mr
Köhler said.
“This will strengthen something which is indispensable and about which I am concerned: the degree of confidence
in the world and between countries; whether it will pay off for them to listen to us, to embark on free trade treaties.
We are prepared to invest in globalisation, not only to take risks in the narrowest sense that a particular programme
may fail but to take risks to reap the benefits of globalisation.”
He accepts some criticisms from campaigners who say the fund has ignored the social effects of its
macroeconomic stabilisation programmes. He talks more now of the importance of education and of social safety
nets, and says the combination of poor economic management and huge income inequalities creates explosive
political situations.
Sometimes, though, the IMF - along with its sister institution, the World Bank - feels that it cuts a rather lonely
figure standing up for the benefits of managed globalisation. And perhaps surprisingly, it feels that it is the rich
countries who hold most power in the fund, rather than the poor countries on its receiving end, which could give it
more support.
During the nervous days of the Asian and Russian financial crises in 1997-8, the IMF formed an almost seamless
nexus with the Group of Seven rich countries, and particularly with the US under the vigorous leadership of
Treasury secretaries Robert Rubin and Larry Summers. These days, the fund is left to make much of the running
on its own, for example, taking the lead in its radical plan to make it easier to restructure sovereign debt. The G7,
formerly accused of acting as IMF puppetmaster, has trailed along behind with varying degrees of enthusiasm.
When it comes to individual cases, such as the Brazil deal, Mr Köhler has no complaints about the G7’s support.
But he could do with support to help him win the broader arguments about globalisation, where the IMF is the
main target of protest. “I would like to see them more visible, not using every opportunity to hide behind the IMF
when there is a debate about the controversial elements of globalisation,” he said. Nor are the rich countries
setting a particularly good example. Structural reform is stalling in the eurozone and Japan, and steel tariffs and
agricultural subsidies mark continued hypocrisy on free trade from the US - all of which harm the global economy
and poor countries.
“This issue - change in the advanced countries as a precondition for sustained growth and peace in the world - has
not yet taken strong enough root,” Mr Köhler says.
“This discussion takes place too much in circles like here; in accusations that the fund and the World Bank are not
doing enough, that they make mistakes, that they are not efficient enough.” Mr Köhler takes care not to appear
overwhelmed by the scope of the historical mission with which his institution is charged. It just sounds like he
could do with some help.
There is a better way to manage debt crises
By Josef Ackermann
Published: September 26 2002 5:00 | Last Updated: September 26 2002
5:00
The world has got better at preventing financial crises. Governments have improved data transparency, emerging
market countries have strengthened their debt management and the International Monetary Fund and World Bank
are now better equipped to assess financial sector stability. But crisis prevention is not enough, as the financial
collapse in Argentina makes clear. Better crisis management is also needed. Deciding on the best way forward
should be a priority at this weekend’s IMF annual meeting. The private sector plays its part in crisis resolution. Of
course, private investors must bear the consequences of their own investment decisions. But to resolve debt crises
effectively, we need procedures for intensive dialogue between debtor countries and creditors. Although the IMF is
usually involved, debt restructuring must ultimately be agreed between those two parties. For the borrower to
impose conditions is unacceptable. Debt restructuring must be orderly and quick. This is in the interests of both
borrowers and creditors. However, the right tools are required, in particular collective action clauses in bond
contracts. This is central to the contractual approach to debt restructuring and has the support of the Institute of
International Finance and the Group of Seven leading industrial nations. Collective action clauses, which under
English law have been incorporated into bonds since the end of the 19 th century, are a market-based instrument for
overcoming obstacles to debt rescheduling.
There is now a consensus that such clauses should become the global market standard. This responds to a
fundamental shift away from syndicated loans towards bonds in emerging market debt. As the use of bonds has
grown, the number, diversity and anonymity of creditors have grown. As a result, it has become much more
difficult to co-ordinate divergent interests, making delays to debt restructuring more likely. The shift to bonds also
increases the risk that individual creditors, such as “vulture funds”, will hold up debt restructuring by taking legal
action. A delay will hit a debtor country’s credit rating and depress bond prices further. In practice, these problems
have proved surmountable; recent debt restructuring exercises had participation rates of more than 90 per cent of
creditors. Still, the multiplicity of investors and the potential for litigation create too much uncertainty. Collective
action clauses would help tackle this problem by making possible a majority debt rescheduling agreement that was
binding on all bondholders. They provide certainty in cases where debt restructuring is unavoidable. Creditors
benefit from an orderly procedure, while borrowers can prevent the crisis from deteriorating further - and for
everyone the whole process is shorter. Governments and international financial institutions generally agree that
collective action clauses have advantages. And yet they are also working on a kind of international bankruptcy law
for governments, the so-called sovereign debt restructuring mechanism. The IMF and some G7 governments are
devoting considerable effort to developing proposals outlined recently by Anne Krueger, the IMF’s deputy
managing director. However, collective action clauses would be just as effective.
It is now up to the private sector to flesh out precisely how collective action clauses could work in practice. We
also need to ensure that they are quickly adopted around the world. The faster this happens, the sooner the majority
of debt outstanding will include collective action clauses.
Academic studies suggest that governments with a good credit rating
would not see the terms on which they borrow deteriorate as a result
of collective action clauses. Still, borrowers appear reluctant to
accept the use of such clauses as a binding market standard. All
advanced countries should agree to include collective action clauses
in future bond contracts, following the example of the members of
the European Union. That would help turn them into a market
standard.
There is widespread agreement on the usefulness of collective action clauses. Governments and international
financial institutions cannot afford to waste any more time.
The writer is chairman of the group executive committee of Deutsche
Bank
Plea by leaders to stick to reform plan
By Alan Beattie in Washington
Published: September 26 2002 21:23 | Last Updated: September 26 2002
21:23
The heads of the International Monetary Fund and World Bank on Thursday urged their shareholder countries to
back existing reforms to the two institutions rather than head off in new directions. James Wolfensohn, president
of the World Bank, said that the meetings should focus on the implementation of the bank’s development strategy,
which has been laboriously hammered out over several years.
Horst Köhler, managing director of the IMF, said the onus was now on the rich countries to liberalise their own
economies to boost global growth, and called on them to push through the fund’s programme of redesigning the
global financial system to make it easier for bankrupt governments to restructure their debt. Both leaders have in
recent days expressed frustration with their leading rich shareholder countries for endangering poor countries’
development by acting in their own narrow self- interest and undermining multilateral efforts.
Mr Wolfensohn’s comments in Thursday’s Financial Times about rich countries’ bilateral aid efforts multiplying
bureaucracy followed the launch earlier this year of the US’s “millennium challenge account”, a $5bn (£3.2bn)
initiative to give money to poor countries under a new set of criteria.
On Thursday, the bank president called on rich countries to come up with more donations to stop the debt relief
programme for poor nations running out of money. He said that donor governments should also back the
“education for all” campaign run by the bank and the British development agency Oxfam.
But despite the institutions’ attempts to focus the meetings on the medium term, they also seem likely to be
overshadowed by the continuing travails in Latin America. Argentina has threatened the extraordinary step of
defaulting on its loans to the bank and fund. On Thursday Mr Wolfensohn said that an Argentine default would
“not be the end of the world” for the bank. Meanwhile, falls in the Brazilian currency and bond prices ahead of
next week’s election are placing the sustainability of the IMF’s $30bn rescue package to the country under
question. On Thursday, Mr Köhler appeared to accept that the leftwing presidential candidate Luiz Inacio Lula da
Silva would win Brazil’s election. Without actually naming the likely winner, he said the incoming president had
made clear he supported the main elements of the IMF programme in Brazil.
Mr Köhler on Thursday released an update on the IMF’s drive to streamline its rescue packages and back them up
with a new judicial bankruptcy procedure for insolvent governments. Though the IMF’s shareholder governments
backed the plan during the fund’s spring meetings in April, they have continued to express concerns about the legal
changes needed to bring the procedure into effect. The parallel part of the plan - to encourage emerging market
governments to put new clauses into their sovereign bonds to make it easier to negotiate restructuring - has yet to
find any takers.