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Debate Intensifies On IMF Funding Bill (fwd)
Debate Intensifies On IMF Funding Bill
Bailout of Russia Would Strain Resources
By Paul Blustein and Helen Dewar
Washington Post Staff Writers
Thursday, June 4, 1998; Page E01
As Russia emerges as the latest candidate for a big new
bailout loan from
the International Monetary Fund, debate is raging with
new intensity over the
IMF's role and U.S. support for the 182-nation
institution.
As far as the Clinton administration and its allies are
concerned, a potential
disaster is looming larger by the day -- a scenario that
can be dispelled only
if Congress approves $18 billion in U.S. contributions
to help replenish the
IMF's depleted coffers.
Asian financial markets are being buffeted by renewed
turmoil just as Russia
nears the brink of a currency collapse. And the IMF,
which already has
committed $35 billion in the past year to rescue
crisis-stricken Asia, has less
than $15 billion left in ready cash. Much of that would
be eaten up by any
Russian bailout package.
"The IMF has had enough money in the till to handle the
Asian crisis if the
crisis did not deepen and did not widen," said House
Banking Committee
Chairman Jim Leach (R-Iowa), a strong IMF supporter. "It
now appears
that Indonesia is deepening it and Russia is widening
it. These are issues that
Congress ignores at the peril of international economic
stability."
But so far, such arguments are doing little to advance
the IMF's cause in
Congress, because the growing talk of a new,
multibillion-dollar bailout for
Russia cuts two ways in the debate over how to handle
international
economic crises. The fund's critics contend that if
anything, IMF rescues
look even less worthwhile since Indonesia descended into
political chaos and
Russian financial markets began to plunge last month.
Both countries, after
all, already had received billions of dollars in IMF
loans at the time their
problems intensified.
"The International Monetary Fund bears much
responsibility for Russia's
current financial straits," House Majority Leader
Richard K. Armey
(R-Tex.) said in a letter to colleagues this week. "The
ever present hope of
an IMF bailout -- reinforced by the enormous
international bailouts of
Mexico in 1995 and Asia now -- has until recently
diluted Russia's
willingness to embrace the financial reforms necessary
to save herself."
The upshot is that the already dim prospects for
approval of the IMF funding
measure this year are looking fuzzier than ever. The
Senate overwhelmingly
approved it earlier this spring, but it has been bottled
up in the House, where
it faces the additional complication that conservative
GOP lawmakers are
insisting on attaching an unrelated abortion amendment
that has prompted
veto threats from the White House.
Sen. Richard G. Lugar (R-Ind.), a supporter of IMF
funding, said the
upheaval in Russia has reinforced arguments on both
sides. "My guess is
that those who blocked it will continue to block it for
the same reasons,"
Lugar said.
Even the IMF's boosters acknowledge the Russian crisis
presents some
unusually thorny dilemmas that highlight the pitfalls of
international rescues.
Prime among these is what economists call "moral hazard"
-- the problem
that bailouts may encourage imprudent behavior by
governments and
investors.
"A lot of money has gone into the Russian market from
people buying
Russian treasury bills knowing that the economic
fundamentals aren't very
strong, but taking comfort that when the chips are down,
the IMF and the
[Group of Seven industrial countries] aren't going to
let that country fail,"
said Desmond Lachman, the head of emerging-markets
research at Salomon
Smith Barney.
Then there is Armey's point about how the likelihood of
being rescued may
have eased pressure on Moscow to reform. The government
of President
Boris Yeltsin so far has failed to take the painful
steps that economists
widely agree are necessary to slash the budget deficit,
collect taxes from
rich and powerful individuals and companies, and
decrease the government's
ever-increasing dependence on short-term borrowing.
But tempting as it may be to reject the pleas from such
investors and
governments for a bailout, the consequences could be
disastrous, in the view
of the Treasury, the IMF and other private experts.
A refusal to provide fresh international loans to Moscow
almost certainly
would cause the ruble to fall precipitously, because the
government is
already dangerously low in its reserves of U.S. dollars
needed to maintain
the ruble's value.
"That would send shock waves, certainly across other
emerging markets,
and probably globally," Lachman asserted. "It would just
magnify what's
occurring in Asia, with the incredible weakness in the
[Japanese] yen and
potential for a recurrence of currency volatility. It's
natural. When investors
smell blood in one market, they ask what other markets
look weak."
Even more important than the danger of financial
"contagion," in the view of
administration officials, is the risk that cutting off
Moscow would severely
undermine Yeltsin's generally pro-reform approach and
help extremist forces
gain influence in a nation armed with thousands of
nuclear weapons.
A Russian rescue wouldn't leave the IMF totally bereft
of cash, officials
involved in the discussions stress. No decisions have
been made about the
new reforms Yeltsin would have to pledge, or of the size
of the loans
Moscow would get. But the IMF has enough cash to cover
its portion of
what is widely expected will turn out to be a $5 billion
to $10 billion package.
The real problem, according to administration officials,
is that once Russia is
rescued, the IMF probably will be unable to finance
further big bailouts. In a
pinch, the fund can tap a $23 billion international
credit line from the United
States and other rich countries -- though that would
present the
administration with new political problems.
Accordingly, IMF supporters are anxiously watching the
battle unfold on
Capitol Hill.
"The argument in Congress is going to shape up in one of
two ways," said
one official closely involved in the rescue effort. "The
crisis in Russia may
be acknowledged as being a much more direct national
security problem
than all those obscure Asian countries, and therefore
the IMF money will sail
through. But there is the risk that the counter case
will prevail -- that in
Russia's case, you're bailing out a government that
doesn't want to reform,
and a Western private sector that wants to get its money
out."
) Copyright 1998 The Washington Post Company