In an interview published in the Washington Post on June 29, IMF Managing Director Christine Lagarde was asked by Howard Schneider: “To what degree are you disappointed in US leadership on the IMF governance issue?” Lagarde replied, “We have been able to significantly increase our resources and our capacity to engage, moving from a little over $300 billion to over a trillion dollars—notwithstanding the fact that the US did not contribute to that move.” Her answer was at best off the mark, and at worse misleading.
The fact is that after the global financial crisis turned virulent in September 2008, the International Monetary Fund (IMF) had about $250 billion in available financial resources with very little credit outstanding. When Lagarde became managing director in July 2011 that figure had been boosted to $750 billion, a portion of which had been lent out or was committed. That tripling of IMF resources was the direct result of a US proposal at the London Summit in April 2009 to increase the size of the IMF’s New Arrangements to Borrow (NAB) by $500 billion. The NAB is the IMF’s permanent capacity to borrow from some members in addition to their quota subscriptions.1 Only a few months later, the Obama administration obtained US congressional approval of a US share of up to $100 billion in the proposed increase in the NAB. This US leadership prodded other members make the necessary approvals by March 2011, almost two years later.2
At the G-20 summit in Pittsburgh in September 2009 and at the subsequent G-20 summit in Seoul, Korea, in November 2010, the United States spearheaded a proposal for IMF governance reform over the strong objections of then-French Finance Minister Christine Lagarde and her European colleagues. As I have written (Truman 2013), it is highly unfortunate that the US administration delayed submitting those reforms to the US congress until this year and, therefore, they have not been implemented.3 US congressional approval is necessary before those reforms go into effect because the United States voting share is 16.7 percent and an 85 percent majority is required to implement the Seoul package of reforms. These reforms involve a reallocation of voting shares in the IMF toward emerging market and developing countries via a doubling of IMF quotas and a commensurate reduction in the commitment by the United States and other countries to the NAB. However, they would add only a trivial amount to the IMF’s effective lending capacity, about $15 billion.
In the meantime, managing director Lagarde has lined up an additional $460 billion in potential ad hoc bilateral loans to the IMF, but that source of funding is not permanent. Moreover, the majority of it would come from members of the European Union that would lend to the IMF, often without the requirement of legislative approval as would be necessary in the United States, so that the IMF can lend to countries in the European Union.4 It is true that the United States declined to participate in these temporary ad hoc lending arrangements to the IMF, which would have required congressional approval and then would expire.
Managing Director Lagarde’s response was off the mark with respect to US leadership in augmenting the IMF lending capacity over the past several years and promoting IMF governance reform. It was misleading in that she conflated the failure of the United States to follow through on its own proposals for IMF governance reform with a lack of US financial support for the IMF.
Truman, Edwin M. 2013. Congress Should Support IMF Governance Reform to Help Stabilize the World Economy. PIIE Policy Brief PB 13-7. Washington: Peterson Institute for International Economics.
1. IMF managing director Dominique Strauss-Kahn was in the process of arranging a smaller amount of temporary ad hoc borrowing from members, but the increase in the NAB added to the permanent resources of the IMF.
2. For the record, during the first half of 2009, I was counselor to Treasury Secretary Geithner and personally involved in decisions at that time.
3. Later on in her answer to Howard Schneider, Lagarde did touch on IMF governance reform “it is really only on the governance reform… that we have been stuck. If anything, it has undermined the position of the one member [the United States] whose ratification would trigger the governance reform implementation and the quota increase.”
4. This $450 billion, on top of the $750 billion already potentially available to the IMF, in principle, would increase the IMF’s lending capacity to $1.2 trillion. (As of the end of June none of the necessary borrowing arrangements had been completed and approved by the IMF executive board.) Lagarde must have been counting some of all these funds to reach her $1 trillion figure and making an adjustment for the fact that some large European countries are currently not in a position to have their quotas or their borrowing commitments drawn upon.