International Policy

Central Bank Bailouts Transfer Wealth To Risky Debtors

The Clinton administration wants Congress to approve an additional $18 billion for the International Monetary Fund (IMF). Supporters of loans to troubled economies claim that they won't cost American taxpayers anything because the loans will be paid back with interest.

Critics counter with these arguments:

  • Although Mexico did repay its $40 billion loan, the IMF has a number of deadbeat debtors on its dole -- including Russia and Kenya -- so payback is far from certain.

  • Even if the loans were paid back, the IMF sets below-market interest rates -- with taxpayers in the U.S. and Western Europe effectively subsidizing the recipient country.

  • Recent IMF loan packages to South Korea, Thailand and Indonesia involve interest rates ranging from 4.6 percent to 4.8 percent on dollar-denominated debt with a maturity of three years -- even while the U.S. government is paying 5.5 percent for debt of that term.

  • Experts calculate that when higher risks and other factors are added in, IMF loans actually represent extraordinarily generous rebates of about 10 percent below market rates.

On the $117 billion the IMF has loaned to East Asia thus far, the region is saving $12 billion a year in interest payments. Over three years, South Korea, Thailand and Indonesia will have received a direct wealth transfer of at least $35 billion -- mostly from U.S. and Western European taxpayers.

Critics make the point that as these counties are benefiting from below-market interest rates, the U.S. government is charging far higher interest rates on loans it makes to its own citizens. The Small Business Administration charges around 10.75 percent, student loans go at about 9 percent and veterans must pay 7 percent on federally guaranteed mortgage loans. They are all, critics note, safer credit risks than East Asian governments.

Source: David Sacks (Independent Institute) and Peter Thiel (Thiel Capital International LLC), "The IMF's Big Wealth Transfer," Wall Street Journal, March 13, 1998.

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