WSJ: Debtors to the Front

Discussion in 'Economics' started by Tom B, Oct 26, 2009.

  1. Tom B

    Tom B

    Debtors to the Front
    A plan to cede U.S. influence at the IMF.

    Banks around the world have been battered in the past year, but most have not responded by turning over control of their businesses to their borrowers. Yet this is what creditors at the International Monetary Fund moved closer to doing at the G-20 meeting in Pittsburgh last month. We understand why fund borrowers want more power, but why would creditor nations, especially Uncle Sam, cede it?

    The terms "debtor" and "creditor" may seem foreign to anyone who reads IMF press releases for the first time. The fund prefers the terms "emerging and developing markets" to describe countries that traditionally borrow hard currency, and "advanced countries" to describe those that provide it. But there's no getting around the reality that only a fraction of the IMF's 186 members are long-term creditors.

    That became clear earlier this year when the G-20 passed the hat to collect $500 billion for a lending facility known as "new arrangements to borrow." Major emerging countries led by Brazil quickly made clear they would only contribute if the fund issued short-term bonds that could be traded in the secondary market. In other words, no long-term commitments from them.

    Creditor countries have always enjoyed more voting power at the fund because without them there would be no reliable pool of money. But several years ago borrower nations, led by members from Asia and Latin America, began clamoring for a greater voice in fund decisions. They argued that since their economies have grown and now represent a larger share of total global GDP, a "democratic" IMF ought to give them a greater share of voting rights.

    Creditors might have replied that the fund is not a democracy and that anyone who wants more votes can get them by ponying up more real money. Instead, in 2008 the board approved a 5% shift in voting rights from what it called "over-represented" creditors to "under-represented" countries. Among the biggest beneficiaries of the 2008 change, once it is ratified, will be China, Korea, India, Brazil, Mexico, Spain, Singapore and Turkey. The eight biggest losers will be the U.K., France, Saudi Arabia, Canada, Russia, Netherlands, Belgium and Switzerland.

    Now the debtors want still more power, and the creditors, led by the U.S. Treasury, are ready to yield. The Pittsburgh G-20 communique states that there will be another "shift in quota share to dynamic emerging market and developing countries of at least five percent from over-represented to under-represented countries." Why "at least?" Because the likes of Brazil and China are lobbying for a 7% shift in votes. Europe, which has the most to lose, opposes this change.

    A spokesman for the fund tells us that the March 2008 voting shift increased the vote share held by emerging and developing countries to 42.1%. That means that if the new 7% solution prevails, emerging countries will have close to a majority. So politicians in Beijing and Brasilia would have more sway over how U.S. taxpayer contributions are spent.

    Perhaps only Barney Frank has benefitted more from the financial crisis than the IMF has. Searching for revenue and without a mission in 2008, it has tripled its resources since the panic began and is now bidding to police the world's economic policies. Given its record of recommending tax increases and currency devaluation, this is not a road to prosperity.

    At least the IMF of yore could be counted on to support Western geopolitical interests. If the IMF is going to turn into something like a bank for the United Nations, with the debtors running the joint, U.S. taxpayers should stop being asked to pay for it.
  2. I am confused about the claim the author makes in this article. Surely, calling China a 'debtor' and a 'borrower' is rather silly? What about India? When did they last borrow from the IMF?
  3. Imagine a world where we did not have a $12 trillion debt, much more in other obligations. Where the CDS and mortgage crisis could not happen or would be very difficult. Where western governments may eventually fall because they cannot pay these massive debts either...

    Where we did not lend money to other countries who would then default and blame the creditor nations and want a stronger voice in the money they seek to borrow.