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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Lee who wrote (19396)	8/22/1998 3:18:00 AM
From: IQBAL LATIF	Read Replies (3) \| Respond to of 50167

Why IMF is wrong in most of the developing countries bail outs! Expectations of quick turn around and introduction of fast track projects by IMF is behind many of these developing and Russian countries ills. We have known from our experience that short money should not be utilized to build long term infra-structure projects, from early experience of US rail roads to Latin America we have seen short money utilization in long term projects as a basic problem. The second cardinal principle is the return on your investment should be higher than the cost of your capital. Unfortunately on both these counts the developing countries fail the acid test. I call in investment time is the greatest healer, even if poor decisions are made on infra-structure projects like who has the best down town or the highest buildings all these do end up paying if the under lying financing is 20 years. Imagine if you buy your residence on 5 years mortgage instead of 20 years or even 30 years long money, even if you have good job you will see that terms of payments and cash out flow from a short term mortgage obligation will lead you to insolvency-- imagine if they insert even in that five year mortgage a clause that we have right to take out our money with a days notice- naturally if your funds are tied up in the house and if it happens at the same time with many houses on the street, you will see slump in prices and fall in value of your issued paper. Governments face similar threats- IMF led rescue packages gives a wrong sense of security to private investors loaded with lot of speculative capital this 'hot money' is looking for returns far in excess of what are paid by TB's. Once they take this risk of higher returns and invest in projects like infra structure they should be expected to face the music too. It is ill conceived idea of IMF to help the developing countries buy growth off the shelf without any realization that if incoming capital ever stop what will happen to the 'ponzi' scheme. Once inflows in these companies dry their is no new money to pay for maturing short term monies, to keep the funds the first sign is to raise domestic interest rates that puts equity markets into a tail spin- the funds which are invested in equity markets first start selling which breeds further selling that in turns brings the currency of that country under further pressure as redeemed equity funds are transferred outside. The developing country which has used the incoming hot money into cosmetic or long-term or crony capitalistic projects in now in a mess, they need huge sums immediately to repay for the redemption's. To complicate the process further the convertibility of 'currencies' in capital and current account is another bigger problem, the hedge funds can borrow in Ringitt when the party is smooth pre storm, sell Ringgit and transfer the proceeds in $ outside, when they see the opportune time to attack like increasing current account deficit the currency speculators hit the markets with two prone objective one to short the currency with an object of devaluation and second to make profits from the stock market shorting. This is kind of double whammy, initially most of the countries try to maintain the onslaught and spend lot of their reserves to protect the exchange rate and interest rate but soon they realize that with all their new riches they just don't have resources to pay for what they expected a long-term investment. The speculators make money on two front one is the settlement of local loans which were earlier taken at much lower rate, other shorting the currency and stock market yields great returns. The 'tessas' or 'tessebanos' in Mexico or 'Bhatt' in Thai or 'Ringitt' or Rupiah are seen as lucrative targets, nothing stops the speculative hedge funds who have a shorter profile to target the currencies which are seen heavily dependent on inflow of capital, the need of packages multi- billion $ arises from this mis-match of short tradable money and long term invested money, in my opinion it is this mismatch IMF should try to avoid it would be rather save to go for slow and steady transition instead of shock therapy. Mature markets have resources but would still not be able to withstand the short selling UK and France both learnt this lesson hard way. If macro economic fundamentals are poor, the artificial strength as a result of incoming hot money is unreliable moreover desire of these countries to develop fast with out any respect of the ground rules is another serious culprit. I also think that the investors who make a calculated judgement to make short term investments in these countries should not be bailed as it encourages further free wheeling speculation. The governments facing these speculators need to get them equipped with some sophisticated financial instruments, since the contagion takes a long time to surface the governments should atleast reduce or insulate the incoming hot money, Chile is one example where short money was never welcome and they have relatively escaped most of the boom bust associated with developing economies. The speculative funds have power of leverage which governments even if they want cannot resort too or would be highly unlikely, but without help of leverage in extraordinary circumstances I just don't see what is available other than IMF for bailing out, we would need some kind of arrangement where the mis match between the objectives of investors and objective of countries are settled, the time frame is one and another problem is the cost of incoming capital should not be higher than returns from utilization of this capital. When countries use incoming capital to build cosmetic projects we find that 'speculators' smell blood. It is due to this that countries like US have flourished the incoming capital is employed rigorously to give higher returns it is not employed in shot term consumption. IMF should train lot of these bureaucrats to learn to swim with sharks and use leverage.