cato: stop imf bailouts

[Robert Weissman <rob@essential.org>]

The latest broadside from the Cato Institute on the IMF. This is an
executive summary of a briefing paper. The full text is available from:

http://www.cato.org/pubs/fpbriefs/fpb-054es.html


Cato Foreign Policy Briefing No. 54

September 27, 1999 

          Repairing the Lender-Borrower Relationship in International
Finance

                                                   by Ian Vasquez 

                 Ian Vasquez is director of the Project on Global Economic
Liberty at the Cato Institute and coeditor of
                             Perpetuating Poverty: The World Bank, the
IMF, and the Developing World. 

                                               Executive Summary 

       Since the end of the Bretton Woods system of fixed exchange rates
in the 1970s, a dysfunctional relationship between lenders
       and borrowers in international finance has developed. The problem
has become more acute in the 1990s as the severity and
       frequency of international financial crises have grown. Through
official lending and mediation, usually led by the International
       Monetary Fund, authorities have reduced the possibility of
sovereign default in an effort to avoid the spread of financial
       turmoil. That strategy has shielded investors and debtors from
economic reality, has prompted calls for changes in the
       international financial architecture, and is leading to some
reforms at the IMF. 

       IMF initiatives to provide preventive bailouts to countries before
difficulties arise and to bail in the private sector are fraught
       with problems. Preventive lines of credit are likely to be misused
and to increase moral hazard, while efforts to force losses on
       the private sector may precipitate the very crises they are
intended to prevent. The historical experience suggests that direct
       two-party bargaining between creditors and debtors is a better way
of handling financial crises than is reliance on official
       third-party interventions. Private investors in the 19th and 20th
centuries regularly solved collective action problems and
       supplied so-called public goods that official agencies intend to
provide. Default, or the real possibility of default, led to
       renegotiations of debt conditioned on reforms in the debtor
country. 

       Official intervention, on the other hand, has not been
characterized by fundamental reforms based on credible conditionality, as
       evidenced by the recent experiences of Russia, Brazil, and East
Asia. During the Third World debt crisis of the 1980s,
       moreover, IMF lending created among all parties a sort of stalemate
that postponed recovery for years. In a world characterized
       by direct two-party negotiations, market institutions in insurance,
credit, and surveillance would do much more to stabilize the
       international financial system than can be hoped for from continued
interventions.