In recent weeks, several governments stricken with financial emergencies have tried to circumvent the International Monetary Fund (IMF) by turning to Russia, China, Saudi Arabia, and other reserve-rich states for crisis finance. These moves underscore the need for common acceptance of a set of principles to guide bilateral and regional responses to countries requiring liquidity and balance-of-payments support during the present crisis. Such principles should be discussed and adopted at the high-level meetings scheduled over the coming weeks as part of the international response to the financial crisis.
The pattern of turning to regional partners for help has been set by Iceland, Pakistan, and Hungary. Iceland tried to engage the Russian government in a rescue operation and tapped liquidity support from the Danish and Norwegian central banks. Pakistan approached China, Saudi Arabia, and the United Arab Emirates for emergency financing. Hungary, while in negotiations with the IMF, also secured liquidity support from the European Central Bank.
Even if Iceland and Pakistan are driven into the arms of the IMF, which appears increasingly likely, the story does not end there. The Asia-Europe Meeting, to be held in Beijing during October 24–25, will present an opportunity for Asian leaders to caucus among themselves. President Gloria Macapagal-Arroyo of the Philippines has proposed that ASEAN+3 leaders meeting in Beijing consider the creation of an Asian rescue fund, a variation on the proposal for a common fund already under consideration. (ASEAN+3 comprises the 10 Southeast Asian members of ASEAN as well as South Korea, China, and Japan.)
Even without any new arrangement, East Asian countries could at any time activate their existing swap lines under a network of bilateral arrangements established eight years ago under the Chiang Mai Initiative (CMI).1 The CMI was mostly, though not completely, linked to IMF programs. Any pooling of the CMI swaps into a common fund, which is being discussed in East Asia, has at least until now also been expected to be linked to the IMF. At present, the first 20 percent of the existing swap lines can be disbursed in the absence of an IMF program.
Regional financial arrangements that have lain dormant in other regions over the last several years could also be activated during this crisis. Members of the European Union that are not in the euro area and need balance-of-payments support are obliged to consult the European Union before drawing funds from the IMF. Beyond Hungary, several Central and Eastern European states that have joined the European Union since 2004 could also be seeking support in the near future. The United States could deploy its Exchange Stabilization Fund, which it has done in previous crises both within and outside the Western hemisphere.
On the other hand, the expansion of regional financial facilities, especially in East Asia, and these recent country cases revive the specter of creditor conflict and underscore the need for clearly defined limits on freelancing in response to crises. I do not argue that it is necessary for all international balance-of-payments finance to be channeled through the IMF. Although we need strong international institutions, especially during crises, we must recognize that the Fund does not have a monopoly on economic wisdom and that regional lenders can play constructive roles.
If regional groups or single governments wish to lend to countries confronting crises, the broader financial community should not block such arrangements—provided they adhere to a set of common principles.
The last global financial crisis, during 1997–98, raised the specter of reserve-rich countries undercutting the conditionality of the IMF by lending directly to stricken states. The United States Treasury torpedoed the proposal of the Japanese Ministry of Finance to create an “Asian Monetary Fund” in Autumn 1997. In the event, most of the emergency finance that was disbursed bilaterally at that time was harnessed to IMF programs. When East Asian governments subsequently developed the CMI, they agreed that its bilateral swaps would be mostly linked to the IMF.
However, the last decade has witnessed important changes that complicate the development of a disciplined common response this time around.
China looms much larger and, with Japan, has accumulated unprecedented amounts of foreign exchange reserves. Chinese foreign assistance in Africa has undermined a consensus of other donors on conditions designed to support economic reform and good governance. The Russian government, which has also accumulated large reserve holdings, cannot be relied upon to support such norms either. Concerned that the IMF might be losing relevance, member countries have been negotiating changes to the governance of the institution to, among other things, give greater voting power to some of the East Asian states. But such reforms are moving slowly at best, and IMF quotas have not been increased since the 1997–98 crisis.
Common principles should specify, in particular, that creditors (1) lend on sound conditionality or link to IMF conditionality, (2) do so transparently and report their arrangements to the IMF, and (3) avoid conflicts with their other multilateral obligations.2 Creditors might differ over what exactly constitutes “sound conditionality.” Some countries will deserve easy conditions, in recognition that they suffer from an externally induced liquidity crisis. Other countries will deserve tough conditionality, in recognition that basic policy choices made them vulnerable and corrections are needed to stabilize. Such conditions should be decided in light of the economic facts in each case rather than by competition among creditors.
More broadly, in times of financial tranquility as well as crises, standing regional arrangements should be reviewed by multilateral institutions periodically and coordinated with them. The North American Framework Agreement and the European Medium-Term Financial Assistance, under NAFTA and the European Union respectively, would be subject to multilateral review just as would the CMI and other arrangements among emerging market and developing countries.
Expansion of the number of official players in global finance complicates the ability to come to agreement on common principles, but this does not mean that agreement is necessarily out of reach. When they consider seriously the consequences of failing to redress vulnerabilities of borrowers, including the risk of default, governments that have nurtured regional alternatives to the IMF could well perceive their stake in the multilateralism more clearly.
Last weekend, Presidents Bush, Sarkozy, and Barroso agreed to convene a set of high-level meetings dubbed “Bretton Woods II” to reform the global financial architecture. Discussing and adopting common principles to guide financial rescues under bilateral and regional arrangements and coordinate them with the IMF should be on their agenda.
2. See also C. Randall Henning, “Regional Arrangements and the International Monetary Fund,” [pdf] in Reforming the IMF for the 21st Century, edited by Edwin M. Truman, Peterson Institute for International Economics Special Report 19 (Washington, DC, April 2006).