IMF Risks Marginalization

The two-day G-20 summit in Mexico ended on [June] 19. Although this summit resulted in the negotiation of the “Los Cabos Growth and Jobs Action Plan” — with China and other countries agreeing to contribute an additional $45.6 billion to the International Monetary Fund and to finish examining the IMF contribution formula by January, 2013 — the European debt crisis refused to yield its position as the Mexican summit’s main topic.

Ever since the Greek sovereign debt crisis erupted, the G-20 summit has seemed more like a European Union summit. Putting aside the grand narrative of the Los Cabos Growth and Jobs Action Plan, it’s easily seen that the IMF reforms that China and others have justifiably been arguing for are still being obscured by the European debt issue — that is, the steps towards IMF reform achieved at the summit are part of an exchange predicated on increases in IMF contributions by China and other countries. Conversely, the United States and other countries, which haven’t increased their contributions, have made known the discord within the IMF, reflecting the dissatisfaction of the U.S. and other countries towards the EU and towards the IMF’s “surround, but don’t attack” European debt crisis aid strategy. One can’t help but worry if the IMF risks being marginalized.

Specifically, even though the increased IMF contributions by China and others have augmented the capabilities of the IMF, and the IMF promises that these funds will be used for bilateral loans, banknote purchase agreements, and other such methods, for the benefit of all members rather than specific regions, the terror caused by the European debt crisis still covering the global financial markets reflects the fact that these contribution increases have a definite direction, but at the same time are full of uncertainty. First of all, the current EU and IMF bailout program is still a barely adequate attempt to reduce risk exposure. The European debt crisis is really a crisis of Greece’s, and other anemic economies’, ability to pay, and the contraction and tax increases of the aid program pushed by the EU and IMF is still a liquidity relief package. Not only will this cut off the flow of blood to the affected countries’ economies, it is unlikely to reduce exposure from the European debt crisis. The current program is like drawing blood from European patients (such as the tax increase recently announced by France’s new government): It will turn sick Europeans into a panic time bomb within the global market.

Secondly, although the IMF promised to use the capital provided by China and other countries for bilateral loans or banknote purchases, funds like the European Financial Stability Facility serve the purpose of raising credit ratings, and until today this capital has been relatively safe. But it’s definitely not risk free; rather, it is the EU and IMF’s rescue fund temporarily borrowing new funds to pay back old debts, an unexposed liquidity risk. However, just three years or so after China contributed to the IMF in 2009, the IMF has once again launched a new round of increases, reflecting the fact that the EU and IMF rescue fund is revealing greater liquidity risk with each passing day and needs member countries to repeatedly increase financial relief contributions. This is without doubt a warning concerning the EU and IMF rescue fund’s liquidity risk.

In light of this, the current IMF and EU rescue plan is like the weaving of a Ponzi scheme-like financial web, imperceptibly constructing a global risk-conducting chain, stringing the EU together with other countries. Because of this, the U.S. didn’t follow the EU and the emerging markets in increasing IMF contributions. Recently the BRIC countries have created an internal financial safety net, reflecting the fears of some countries that the EU rescue plan will become a new source of global risk.

Furthermore, that countries such as the U.S. haven’t chosen to increase contributions to the IMF indicates that the IMF faces a risk of marginalization. Just as the WTO faces competition from FTAs, bilateral trade agreements and free trade zones, the current international financial system based around the IMF increasingly faces burgeoning regional financial stability system hedging. The IMF, trapped in the Euro debt crisis swamp, is seeing the international influence it acquired during the crisis erode. This makes one worry that the right to speak at the IMF won by emerging economies through contribution increases will be devalued as the IMF’s international influence is damaged. After all, if the global financial crisis and southern Europe’s opportunistic high welfare have created the sovereign debt crisis, then by continuously expanding the score of aid, the IMF would appear to be brewing a super-sovereign debt risk. Considering that the IMF lacks the re-loan capacity that central banks have, the exposing of the super-sovereign debt risk will accelerate the IMF’s marginalization.

From this we can see, as each country cooperatively works for a common cure at the current G-20 meeting, that we should at the same time learn a lesson from the sovereign debt crisis created by governments losing their heads and avoid over-reliance on international organizations that could give rise to a super-sovereign debt risk. Just as the economist [Douglass] North pointed out, economics has never accumulated enough knowledge to master the fluctuations in the economy. Therefore, rather than conceitedly searching for institutional structures to surround the risk exposure, it would be better to remodel our reverence for the market, and stimulate the economy’s internal forces through recombining debt, lowering taxes and cutting spending.