Healthy Countries to Receive I.M.F. Loans

The New York Times
By MARK LANDLER

Published: October 29, 2008

WASHINGTON — Just as the American financial crisis has gone global, so has the rescue effort.

On Wednesday, the International Monetary Fund announced it would lend up to $100 billion to healthy countries that are having trouble borrowing as a result of the turmoil in the global markets. And the Federal Reserve said it would commit up to $30 billion each to Brazil, Mexico, South Korea and Singapore, to enable those countries to more easily swap their currencies for dollars.

The coordinated measures are meant to restore confidence in emerging markets, where stocks and currencies have plunged in recent days as hedge funds and other investors pull out.

Shares and currencies surged in places like São Paulo and Mexico City on Wednesday after the news.

“It would just be a huge, unfortunate mistake if we allowed the stresses of the financial systems in the United States and Europe to spill over and unintentionally undermine these economies,” said Charles H. Dallara, the managing director of the Institute of International Finance, a group of more than 300 global banks that pushed for the measures.

Already, fragile economies in Iceland, Hungary and Ukraine have almost collapsed, and are receiving emergency loans from the fund.

This new program — potentially one of the largest in the fund’s history — is intended for countries with more sound finances and solid growth that suddenly face the threat of corporate or even government defaults as foreign investors flee.

Countries in this category, including Brazil, Mexico and South Korea, depend on foreign capital to finance trade and investments. Some have also borrowed heavily in foreign currencies, and the sharp declines in their own currencies make those debts much harder to repay.

Under the program, countries could borrow five times the amount they are normally entitled to — $25 billion, in Brazil’s case — without the strict conditions that normally accompany such loans. While the loans are for just three months, they can be rolled over three times, giving the countries close to a year to cover shortfalls.

The loans will carry none of the strings that usually accompany fund money, including demands to raise interest rates and cut public spending.

The Fed’s move will allow South Korea, Singapore, Mexico and Brazil to increase the supply of scarce dollars circulating in those markets.

The agreements are similar to swaps the Fed has set up with the Bank of Japan, the Reserve Bank of Australia, the European Central Bank and others to ease the credit crisis in developed economies.

The Fed welcomed the fund’s initiative. And the Treasury secretary, Henry M. Paulson Jr., said the measures showed deepening international cooperation two weeks before a meeting of world leaders in Washington to discuss the crisis.

There had been rumors that the Fed and other central banks might help finance the fund’s loan program. But Mr. Dallara said the Fed would have found that awkward, because the United States’ contribution to the fund is channeled through the Treasury.

The fund said it would finance these loans with its own resources, which total about $200 billion. It is soliciting more money from countries with hefty foreign-exchange reserves, like China, Japan and oil exporters.

The fund has already agreed to lend $15.7 billion to Hungary, $16.5 billion to Ukraine and $2.1 billion to Iceland. It is in talks with Pakistan over a loan that could be even larger. The list of troubled countries will almost certainly grow.

“We probably will need more resources,” said Dominique Strauss-Kahn, the fund’s managing director, at a news conference. “There is no way the fund can solve the problem on its own.”

The loan program greatly expands the fund’s role in the crisis at a time when world leaders are starting a debate about how to fashion a new global financial framework. With Western countries burdened by their own costly rescue efforts, the fund seems likely to remain the major provider of support to emerging-market economies.

That prospect troubles some critics, who contend that the fund is prescribing the same radical measures that caused unnecessary pain in some Asian countries during that region’s financial crisis a decade ago.

Iceland, they said, just raised its interest rate by 6 percentage points, to 18 percent, to try to stabilize its currency, which had been decimated after its banks failed. The interest-rate increase, fund officials said, was a condition of Iceland’s emergency loan.

“They used the same vocabulary they used in past crises: that we need to restore confidence,” said Joseph E. Stiglitz, a Nobel Prize-winning economist who used to be the chief economist of the World Bank. “It doesn’t restore confidence; it just leads to further bankruptcies.”

If the fund prescribes such remedies in a socially unstable country like Pakistan, he added, the risks would be enormous. Still, Mr. Stiglitz said he was encouraged by the new loan program.

The government of Hungary warned on Wednesday that taking a loan from the fund would place burdens on the public. A former central bank governor, Peter Akos Bod, said he worried that the fund would press Hungary to raise its interest rates, which are already high and which, he said, contributed to the habit of Hungarian companies and individuals of borrowing in foreign currencies.

Suspicion of the fund is a global phenomenon: the Korean government declared it would not take any loans. Feelings there are still raw from the Asian financial crisis, during which the fund forced South Korea and other countries to raise their interest rates sharply.

Mr. Strauss-Kahn, a former French finance minister, said he was aware of resistance stemming from the Asian crisis and was trying to tailor loans more closely to the conditions in the countries.