Two months ago, Iceland became the first country whose economy collapsed because of the global economic crisis, and it became the first to apply for aid from the International Monetary Fund (IMF). Since then, Pakistan also has appealed to the fund, as have Ukraine, Belarus, Hungary, and Latvia.
Can the IMF handle this much work? Is its culture consistent with such a rush of applications? Will its contributing countries -- themselves caught unawares in the same crisis -- be able to make up any shortfall?
RFE/RL Washington correspondent Andrew F. Tully put these and other questions to Desmond Lachman, formerly the deputy director of the IMF's Policy and Review Department and now a resident fellow at the American Enterprise Institute, a private policy research center in Washington.
RFE/RL: Quite a few countries are turning to the IMF for help, and perhaps more will need it in the near future. How much money does the fund have in reserve?
Desmond Lachman: They've got something like $200 billion, and they can draw on another $50 billion. So the amount of money that they've got of their own is around about $250 billion. Now, that amount doesn't sound nearly large enough for the kind of demands on the resources that they're going to be getting. But the IMF very frequently operates as a catalyst for other lenders to come in.
If you look at the Icelandic case, the IMF is only proposing to lend Iceland something like $2 billion. But the overall package is now going to be $10 billion because the Nordic countries are stepping up to the plate a bit, Japan is offering to chip in, the U.K., Germany, and so on. So what the IMF can do is frequently have a very much larger program than its own resources would allow.
Lots Of Questions
RFE/RL: Does this mean, then, that the $250 billion will be enough to handle the current number of countries in distress, and others that may need it later on?
Lachman: For instance, Hungary -- what occurred is that the IMF loaned something like $12.5 billion, and it was either the European Commission or the [the European Central Bank] who added something like $5 billion to that package. Now, even if they get others to come in, can [the IMF] marshal enough funds to arrest the problem? And the reason is that often times in Eastern Europe, the foreign banks just stop lending to the
country and there's a certain amount of capital flight [from countries in the region]. So that can very easily dwarf the sort of resources that the IMF can marshal.
So there's a question mark, for instance, on the Hungary program whether the program is going to be successful if this global crisis continues and you get foreign banks not wanting to lend money. Then it's questionable whether the $12 billion that the IMF put up is going to be up to the task of stabilizing the Hungarian forint.
RFE/RL: The IMF, of course, doesn't grow its own money, but relies on member nations to fund it, including the United States, Britain, France, and others. These countries face trouble, too, in the current financial crisis. Will they be able to keep contributing to the IMF as generously as they have until now?
Lachman: I don't think that we would get any increases in the IMF's resources. Where there's a possibility that the IMF can do more is, in operating in this catalytic manner, it could induce other countries that have interests in the particular country that they're trying to rescue to provide resources.
So, for instance, if we're talking about Hungary, while the IMF might only be able to provide $12 billion, what it could do is perhaps it could persuade the Europeans that it's in the Europeans' interests to put up a lot more money so that they don't have Hungary collapsing on their doorstep.
RFE/RL: Ordinarily the IMF receives requests for assistance at a much slower pace than today. Does the fund have the culture, if you will, of responding to an ever-increasing number of requests in rapid succession?
Lachman: They've certainly got a lot of staff. They've been underutilized for the last couple of years, and now the crisis has come in a big way in many countries that they're having to deal with. I think that they've got the capability to deal with it just in terms of technical staffing and the like. The question is: Do they have enough money to lend to these countries? And everything depends on: How does this crisis evolve?
Now, currently, it's not looking very good. Things have worsened appreciably the last couple of weeks. But hopefully, when there's a new administration in the U.S. -- some leadership to adopt some measures -- things will calm down. But if things don't calm down, the IMF is going to be extremely stretched.
'Dead Duck,' Not 'Lame Duck'
RFE/RL: You just referred to the new administration in the United States. How much does all this depend on U.S. President-elect Barack Obama?
Lachman: The problem that we've got right now is that we're getting the crisis deepening, yet there's a political vacuum now for the next two-and-a-half months. So that is highly problematic because normally what would be occurring is, if the markets were melting down like they've been doing this week, there'd be some sort of policy response that would give market participants something new to think about to calm them down, that the "cavalry's on its way."
And now we've got a government that I wouldn't call a "lame duck," I would call it a "dead duck."
RFE/RL: You make it sound as if what the United States does is extremely important.
Lachman: Oh, no, no. What the United States does is more than extremely important. It's key. The United States has to come up with some
sort of policy package that is very coherent, is very believable, it's got to really be instilling confidence, because otherwise we're really in deep trouble.
Basically what occurs is that when [stock] markets melt down, that isn't without consequence for the real economy. So the fact that
share prices keep falling, consumers are just beside themselves with fear. They're not spending, so it sends the economy down, which then comes back to affect the share prices. It's really critical that you get a package soon that calms the market down.
RFE/RL: The IMF already has had requests for aid from countries ranging from Iceland to Ukraine to Belarus to Pakistan. Do you expect others to join that list?
Lachman: I would say that the ones that are on the list are any countries that have got high external financing needs. So Turkey would be a very big country that the IMF's already in discussions with. I'm sure that Turkey will have a program. In East Europe, there are a whole lot. There's
the obvious ones that spring to mind -- all of the Baltic countries, there's Bulgaria, there's Romania. You'll get more countries [petitioning the IMF] because countries have been damaged.
Firstly, countries in Latin America being really hit very hard by the fact that oil prices are now at below $50 rather than at $150. But it depends very much on how deep the downturn is in the United States and how prolonged it is. The longer the downturn is, and the more severe it is, the more countries the IMF will have at its door.
RFE/RL: Ultimately, where do you stand on this? Are you optimistic or pessimistic?
Lachman: I generally tell people I'm realistic, and I think in my own mind that I'm right. People have called me pessimistic the whole of last year, but when I look at events, events are a lot worse than I thought they were.
Can the IMF handle this much work? Is its culture consistent with such a rush of applications? Will its contributing countries -- themselves caught unawares in the same crisis -- be able to make up any shortfall?
RFE/RL Washington correspondent Andrew F. Tully put these and other questions to Desmond Lachman, formerly the deputy director of the IMF's Policy and Review Department and now a resident fellow at the American Enterprise Institute, a private policy research center in Washington.
RFE/RL: Quite a few countries are turning to the IMF for help, and perhaps more will need it in the near future. How much money does the fund have in reserve?
Desmond Lachman: They've got something like $200 billion, and they can draw on another $50 billion. So the amount of money that they've got of their own is around about $250 billion. Now, that amount doesn't sound nearly large enough for the kind of demands on the resources that they're going to be getting. But the IMF very frequently operates as a catalyst for other lenders to come in.
If you look at the Icelandic case, the IMF is only proposing to lend Iceland something like $2 billion. But the overall package is now going to be $10 billion because the Nordic countries are stepping up to the plate a bit, Japan is offering to chip in, the U.K., Germany, and so on. So what the IMF can do is frequently have a very much larger program than its own resources would allow.
Lots Of Questions
RFE/RL: Does this mean, then, that the $250 billion will be enough to handle the current number of countries in distress, and others that may need it later on?
Lachman: For instance, Hungary -- what occurred is that the IMF loaned something like $12.5 billion, and it was either the European Commission or the [the European Central Bank] who added something like $5 billion to that package. Now, even if they get others to come in, can [the IMF] marshal enough funds to arrest the problem? And the reason is that often times in Eastern Europe, the foreign banks just stop lending to the
country and there's a certain amount of capital flight [from countries in the region]. So that can very easily dwarf the sort of resources that the IMF can marshal.
So there's a question mark, for instance, on the Hungary program whether the program is going to be successful if this global crisis continues and you get foreign banks not wanting to lend money. Then it's questionable whether the $12 billion that the IMF put up is going to be up to the task of stabilizing the Hungarian forint.
RFE/RL: The IMF, of course, doesn't grow its own money, but relies on member nations to fund it, including the United States, Britain, France, and others. These countries face trouble, too, in the current financial crisis. Will they be able to keep contributing to the IMF as generously as they have until now?
Lachman: I don't think that we would get any increases in the IMF's resources. Where there's a possibility that the IMF can do more is, in operating in this catalytic manner, it could induce other countries that have interests in the particular country that they're trying to rescue to provide resources.
So, for instance, if we're talking about Hungary, while the IMF might only be able to provide $12 billion, what it could do is perhaps it could persuade the Europeans that it's in the Europeans' interests to put up a lot more money so that they don't have Hungary collapsing on their doorstep.
RFE/RL: Ordinarily the IMF receives requests for assistance at a much slower pace than today. Does the fund have the culture, if you will, of responding to an ever-increasing number of requests in rapid succession?
Lachman: They've certainly got a lot of staff. They've been underutilized for the last couple of years, and now the crisis has come in a big way in many countries that they're having to deal with. I think that they've got the capability to deal with it just in terms of technical staffing and the like. The question is: Do they have enough money to lend to these countries? And everything depends on: How does this crisis evolve?
Now, currently, it's not looking very good. Things have worsened appreciably the last couple of weeks. But hopefully, when there's a new administration in the U.S. -- some leadership to adopt some measures -- things will calm down. But if things don't calm down, the IMF is going to be extremely stretched.
'Dead Duck,' Not 'Lame Duck'
RFE/RL: You just referred to the new administration in the United States. How much does all this depend on U.S. President-elect Barack Obama?
Lachman: The problem that we've got right now is that we're getting the crisis deepening, yet there's a political vacuum now for the next two-and-a-half months. So that is highly problematic because normally what would be occurring is, if the markets were melting down like they've been doing this week, there'd be some sort of policy response that would give market participants something new to think about to calm them down, that the "cavalry's on its way."
And now we've got a government that I wouldn't call a "lame duck," I would call it a "dead duck."
RFE/RL: You make it sound as if what the United States does is extremely important.
Lachman: Oh, no, no. What the United States does is more than extremely important. It's key. The United States has to come up with some
sort of policy package that is very coherent, is very believable, it's got to really be instilling confidence, because otherwise we're really in deep trouble.
Basically what occurs is that when [stock] markets melt down, that isn't without consequence for the real economy. So the fact that
share prices keep falling, consumers are just beside themselves with fear. They're not spending, so it sends the economy down, which then comes back to affect the share prices. It's really critical that you get a package soon that calms the market down.
RFE/RL: The IMF already has had requests for aid from countries ranging from Iceland to Ukraine to Belarus to Pakistan. Do you expect others to join that list?
Lachman: I would say that the ones that are on the list are any countries that have got high external financing needs. So Turkey would be a very big country that the IMF's already in discussions with. I'm sure that Turkey will have a program. In East Europe, there are a whole lot. There's
the obvious ones that spring to mind -- all of the Baltic countries, there's Bulgaria, there's Romania. You'll get more countries [petitioning the IMF] because countries have been damaged.
Firstly, countries in Latin America being really hit very hard by the fact that oil prices are now at below $50 rather than at $150. But it depends very much on how deep the downturn is in the United States and how prolonged it is. The longer the downturn is, and the more severe it is, the more countries the IMF will have at its door.
RFE/RL: Ultimately, where do you stand on this? Are you optimistic or pessimistic?
Lachman: I generally tell people I'm realistic, and I think in my own mind that I'm right. People have called me pessimistic the whole of last year, but when I look at events, events are a lot worse than I thought they were.