In Troubled Times, Countries Seek IMF Help

The global financial crisis has given the International Monetary Fund a new lease on life. Countries had been pulling away from the IMF and the reforms it demands. Now, Pakistan, Hungary, Iceland and others are turning to it to protect them in the global credit crunch.

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The International Monetary Fund is a lender of last resort. And the global financial crisis has put the IMF back on the map. Iceland, which initially turned to Russia for help, has negotiated an IMF bailout. Pakistan, which first looked for money from China, is talking with officials at the fund. And today the IMF said they will make short-term credits available quickly to others. NPR's Michele Kelemen reports.

MICHELE KELEMEN: A former chief economist of the International Monetary Fund, Simon Johnson, reinvents an old Mark Twain quote to explain the ups and downs of the IMF.

Professor SIMON JOHNSON (Entrepreneurship, Sloan School of Management, MIT): Rumors of the IMF's death were greatly exaggerated in previous years. To be honest, it's only been about five years since the IMF's lending was at its peak.

KELEMEN: It is an institution that thrives during crises. And though just a few years ago, countries shunned the IMF and the heavy conditions it places on loans, emerging economies facing a run on their foreign currency reserves are now back knocking on the IMF's door. The fund, together with the World Bank and the European Union, announced a $25 billion bailout for Hungary today, following its other deals with Iceland and Ukraine. Simon Johnson, who now teaches at MIT's Sloan School of Management, says these bailouts still pale in comparison to the money the U.S. and Europe are injecting into their economies.

Professor JOHNSON: The difference is between a T and a B. So the amounts that have been used to bail out banking systems and, obviously, support lending more generally in the U.S. and Europe are in the trillions, with a T. The amount that the IMF has to take care of all emerging markets, they have 200 billion, with a B.

KELEMEN: British Prime Minster Gordon Brown is appealing to China and Persian Gulf states to kick in billions more to the International Monetary Fund which gets most of its money from the U.S. and Europe. Arvind Subramanian, a former IMF official now with the Peterson Institute for International Economics, says if European nations want to bring in China's resources, they'll have to give up some power they have within the institution.

Dr. ARVIND SUBRAMANIAN (Senior Fellow, Peterson Institute for International Economics): So, a big IMF is something that I think is worthwhile thinking about in terms of resources. But for it to be remotely acceptable to the emerging market countries, there would need to be a radical reform of the government structure.

KELEMEN: At the moment, many believe the European Union has disproportionate rights and voting power and controls the presidency. Those aren't the only things that need to change in the way the IMF works, according to Subramanian.

Dr. SUBRAMANIAN: It has to be more nimble, lend money out more quickly. That's kind of the mundane way in which things will change. But more critically, I think the IMF has probably come round to believing that it has to have a lighter hand in its dealings with countries. No longer can the IMF be terribly ideological about what it says.

KELEMEN: This afternoon here in Washington, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, announced a new program to get cash quickly to developing countries and without the usual conditions that come along with such loans.

Dr. DOMINIQUE STRAUSS-KAHN (Managing Director, International Monetary Fund): It's a new process which has been designed very rapidly. And it shows that the fund is able to react very quickly and decisively to help its membership.

KELEMEN: He says countries need to have a good track record to apply. And though he didn't name countries seeking such loans, IMF officials expect the line to be long. Johannes Linn of The Brookings Institution says this is a good time for the IMF to think about ways to give emerging countries a greater voice.

Dr. JOHANNES LINN (Senior Fellow, Global Economy and Development Program, The Brookings Institution): There's also a greater sense of modesty perhaps among IMF colleagues in listening perhaps better to the various stakeholders, their clients, and so on, and fashioning a response in each country that is really more owned, also very importantly, by the governments and the countries concerned. So, yes, I think there is a certain amount of reinvention going on.

KELEMEN: France is proposing a new conference to discuss more broad changes to the fund and other institutions that grew out of the so-called Bretton Woods process after World War II. The Bush administration has agreed to host a meeting of the world's biggest economies next month and will include emerging powers like China and India. But U.S. officials are already trying to downplay expectations for the November summit. Michele Kelemen, NPR News, Washington.

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Cash-Strapped Pakistan Turns To World For Bailout

The focus of the international financial crisis is quickly shifting from troubled banks to troubled countries, and the bailout challenge is growing more complicated.

Pakistan's government this week said it is being drained of its hard currency reserves and warned that its efforts to fight terrorism could be at risk unless the world comes through quickly with a big bailout.

Pakistan has not yet appealed for help from the International Monetary Fund, which normally would be expected to intervene in such a situation. The IMF is juggling aid appeals from several countries, and Pakistani officials say they would prefer to get help elsewhere.

The country's financial troubles arose in part because many Pakistanis took out loans in U.S. dollars. They changed the dollars into rupees and spent them in Pakistan. But the value of the U.S. dollar has gone up, so when the time comes to change those rupees back into dollars and pay off the loans, it will cost a lot more.

An Impossible Debt Burden?

Pakistan's government has been spending its own dollar reserves, buying rupees in order to keep up demand for the currency.

"If they allow their own currency to tank, then all these other individuals, corporations are going to be broke," says Kenneth Rogoff, a former chief economist at the IMF. "Because they've borrowed in foreign currency [and] their income is in domestic currency ... if the foreign currency goes way up, it makes the debt burden impossible."

But a government cannot prop up its currency indefinitely. Pakistan is burning through its dollar reserves at about a billion dollars a month and desperately needs a financial bailout.

Husain Haqqani, Pakistan's ambassador to the U.S., this week asked "people in the world's capitals" to remember Pakistan's role in the global war on terrorism and to come now to its rescue.

"If they can give hundreds of billions of dollars in economic bailouts [in their own countries], then certainly a nation that is critical to global security also deserves international assistance in terms of being able to reshape its economy and getting back on an even keel," Haqqani said.

The situation is urgent. In Islamabad on Tuesday, German Foreign Minister Frank-Walter Steinmeier said Pakistan needs help in the next six days. Steinmeier said it should come from the International Monetary Fund, but the IMF often insists that governments cut spending as a condition for getting help. Pakistan's government on Tuesday said it could "ill afford" the IMF conditions. It has sought help instead from countries such as China and Saudi Arabia that are sitting on big cash reserves of their own.

New Competition In The Bailout Business

In other cases, oil-rich countries like Venezuela and Russia have stepped up to help countries in need. David Rothkopf of the Carnegie Endowment for International Peace says the rise of these new "donor nations" means the IMF is no longer the only place a cash-strapped country can turn.

"Since the IMF has been so insistent on tough conditions that ultimately were seen in many countries as being socially difficult," Rothkopf says, "it's appealing for people to find these other sources."

Rothkopf describes what's happening as "a rebalancing of soft power," as opposed to military power. "The power that doesn't come at the point of a gun comes at the point of a check writer's pen," Rothkopf says, "and the community of check writers is getting bigger and bigger." That means the IMF faces new competition in the bailout business.

To some extent, the IMF welcomes it. The list of countries needing billion-dollar bailouts is now so long that the IMF won't be able to help them all.

"If you just look at a country like Turkey or Brazil, both of whom are having difficulties, the kind of number one might need is a hundred billion or more," says former IMF economist Rogoff, who is now at Harvard University. "The IMF is not in a position to come in with overwhelming force. It really can't stop the panic by itself."

Rogoff says addressing the global financial crisis will take cooperative, coordinated action by individual donor countries and by international institutions like the IMF. And the countries in need may not be able to pick and choose their rescuer.

Neither China nor Saudi Arabia nor any other country has offered Pakistan the financial help it needs. Within days, Pakistan may have no alternative but to accept IMF budgetary restrictions and negotiate for an aid deal, no matter how politically unpopular that option may be at home.

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