More Large-Scale Lending by the International Monetary Fund?

September 16, 2013

Christine Lagarde, the International Monetary Fund's (IMF) Managing Director, has offered IMF financial support to the countries gripped by the market currency crisis (Brazil, India, Indonesia, Turkey and South Africa) and has questioned whether the IMF has sufficient financial resources to meet this new emerging market challenge, says Desmond Lachman, a resident fellow at the American Enterprise Institute.

Legarde does so in seeming disregard of the lack of systemic importance of the countries concerned and the very different economic circumstances of the emerging market countries from those in the European economic periphery. She also does so seemingly unmindful of the moral hazard that a new round of large scale IMF lending would pose to the global financial system and the corresponding risks that would be involved for the global taxpayer so soon after the unprecedented scale of IMF lending to the European periphery.

  • Unlike the countries of the European economic periphery, which are locked into a monetary union and which owed extraordinarily large amounts to the European banking system, the emerging market economies all have flexible currencies and their debt to the international banking system is of a manageable order.
  • The most useful role that the IMF can play in the current emerging market economic crisis is to help those countries get back to an economic policy path that restores both domestic and external investor confidence in those economies.

While it must be expected that Lagarde will use the emerging market crisis as an excuse for a bigger IMF, there is little real reason to go down this route. If the IMF sticks to its role in the emerging market economies of being a catalytic lender and a provider of a seal of good housekeeping, the IMF has more than enough resources to do the job. This would seem to be particularly the case now that the European Central Bank has effectively relieved the IMF of its major lending role in Europe through the creation of its Outright Monetary Transaction program.

Source: Desmond Lachman, "Do We Really Need More Large-Scale IMF Lending?" Yahoo! Finance, September 3, 2013.

 

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