Confusion reigns but coffers
clearly are bare
By Peter Hartcher
In the century and a quarter since financial crises started to cross oceans and go global, most have passed with relatively little real pain. But three led to long and deep depressions.
The common element in these depressions?
First in 1873, then in 1890 and most recently in the Great Depression of the 1930s, there was no-one for stricken countries to turn to in their most desperate moments. There was no lender of last resort.
"With no world government, no world central bank, and only weak international law, the question of where last-resort lending comes from is a crucial one," writes an authority in the crisis business, the American economic historian Charles Kindleberger.
But this time, the International Monetary Fund is there, right? And although its economic prescriptions for troubled countries have been flawed, it remains the centrepiece of the system of international support.
Yes, but the IMF has already mobilised $US135 billion in emergency funds in just 12 months.
It's already had to take extraordinary measures - dipping into what it calls its "reserve tank" - just to put together a thoroughly inadequate emergency package for Russia.
So exactly how much does the IMF have left?
Let's go to a press conference at the Washington headquarters of the IMF at 1.30pm on July 13. The IMF had just announced fresh emergency funds for Russia of $US22.5 billion and the reporters wanted to know how much the IMF still had in the bank.
But after some confusion, instead of answering the reporters, the officials started to question each other.
The deputy managing director of the IMF, the customarily smooth Dr Stanley Fischer, turned to his treasurer, Mr David Williams.
Fischer: Let me get this straight. We have 44 billion [US dollars]?
Williams: No. At the moment, we have $31 billion.
Fischer: Thirty-one. And at a 30 per cent liquidity ratio, how many dollars would we need?
Williams: We would then be down to seventeen and a half.
Fischer: So thirty minus seventeen and a half?
Williams: Yes.
Fischer: So at a 30 per cent liquidity ratio, we need $17.5 billion, and we've got 30, so the lendable is the difference.
Reporter: And how much is that?
Fischer: Twelve and a half.
One reporter was foolish enough to think that this figure, from the lips of the IMF's deputy managing director at a public press briefing, might be the correct answer.
Reporter: So [that's] the lendable resources after taking Russia and other loan programs into account?
Williams: No. After taking Russia into account . . . the gross figure, not the net, would be $17 billion . . .
Reporter: Could we talk to you about this after?
Fischer: I think that's a very good idea.
This does not exactly inspire confidence in the world's lender of last resort. Let's clear the fog a little. There are three key points.
First, the IMF already has run down its regular fund available for bailing out countries in difficulty. In aiding just four countries - Thailand, Indonesia, South Korea and Russia - it has put together packages totalling $US135 billion.
Of that amount, $US47 billion is from the IMF itself. (The rest is from its sister institutions - the World Bank and Asian Development Bank - and from individual governments around the world which have pledged additional money.)
This has left the IMF with $US18.8 billion available for emergency credit in support of countries in extreme trouble. If just one more country gets into strife, this could easily disappear altogether. The IMF has pledged $US20.9 billion to South Korea alone, for instance.
But it can't afford to run down its funds to a zero balance. Why not? Because its capital base is paid in by its members - national governments, and those governments areentitled to demand their money back on just three days' notice.
As the IMF's Fischer says: "Countries have a right to draw. We like to keep the liquidity ratio [percentage of resources on hand] well above 30 per cent because if Australia were to show up and ask for its reserve tranche, they have a right to it."
Guess what the fund's liquidity ratio is now? It's down to 19 per cent, the lowest point since the fund was established in the aftermath of World War II.
Second, it has broken its own rules and reached into the "reserve tank" - the pool of funds contributed by the core of rich countries at the centre of the IMF system for their own use. The fund used $US8.4 billion of this money for Russia. This pool is called the general agreement to borrow, or GAB.
"It is absolutely unprecedented to use the GAB in this way," says the chief economist for Chase Manhattan Bank in New York, John Lipsky.
"The GAB was designed for the internal use of the 11 industrialised countries, for crises of the scale of the UK crisis of 20 years ago, which was the last time it was used. But now it's being used for Russia. We are seeing rules and procedures being made up as we go along."
In short, the IMF is desperate. As Fischer says: "We don't regard ourselves as having lendable resources except to the extent we draw on the GAB."
The third point is that as this crisis continues to unfold, there are plenty of countries which may yet need IMF support. The fund is now holding talks with Ukraine and Pakistan; there are at least half a dozen other countries in Latin America and Eastern Europe that may yet need to call on the lender of last resort.
What would happen if any of these countries made a cry for help? "We are entering a region in terms of our financing where we are in grave difficulties," says Fischer. "There is another $US14 billion we could draw on if the GAB lenders agree, but in the event of a major crisis, we would be in difficulty."
So the IMF has asked 25 of its richer shareholder governments to put together a new fund of $US92 billion. Sounds good? The problem is that the US Congress is not prepared to approve the US contribution of $US18 billion and is vetoing the whole proposal.
But hold on. In the very earliest days of the crisis last year, Japan suggested a new Asia Fund of $US100 billion for exactly such emergency support. It offered to pay in half this sum.
The problem here was that the US administration vetoed this idea, too. US sympathisers including Australia also objected. Why? Professor Hugh Patrick of Columbia University in New York explains:
"The US quickly rejected it out of hand because it saw it as a Japanese intrusion into its sphere of influence. And at that time, it was thought the IMF money would be adequate . . . It was a mistake."
And Japan's $US50 billion offer has since been withdrawn. As Chase Manhattan's Lipsky says: "It's realistic to say that the international crisis management system is itself in crisis."
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