“Funding the Fund”… or Not: Debunking WaPo’s Pro-Supplemental Editorial

Below are some comments on today’s plea from the Washington Post Editorial Board for more money for the International Monetary fund.

Funding the Fund

Congress should support promised aid to the IMF.

Thursday, June 11, 2009

NOT LONG AGO, the International Monetary Fund looked very much like an institution without a mission. Then came the global financial crisis, and a series of countries around the world found themselves flirting with national bankruptcy. The potential ripple effect for the world economy was grave, and the IMF’s available resources looked too small to meet the challenge. At a meeting of the Group of Eight countries on April 2, President Obama joined other leaders in pledging to triple IMF funds to $750 billion, including $100 billion in new U.S. money.

To speed the fulfillment of his promise, Mr. Obama attached his request for IMF money, which is not a cash outlay but a line of credit, to a supplemental appropriations bill for operations in Iraq and Afghanistan.

Actually, as any Member of Congress or staff can tell you, the Administration attached the IMF money to the war supplemental because the chances of getting the House to vote for it on a straight up-or-down vote were slim to none. By attaching the IMF money, which has nothing to do with war spending, to this bill, the Administration was putting Members of Congress who want to vote against the IMF money in a position where they could be accused of “voting against money for the troops.”

It should be noted that there is no urgency for this money; the IMF has hundreds of billions of dollars available for any emergencies that might arise during the time it would take to approve this funding through a normal legislative process.

The Senate has approved it, but the House is balking. At a time when many Americans are losing their jobs, the IMF is vulnerable to populist attack.

The funding is particularly vulnerable to “populist attack” because it is very likely that the money will be used to bail out European banks, something that was already done under the TARP program through AIG, and is not generally considered by the citizenry to be a good use of U.S. tax dollars. (more…)

The Next Big Taxpayer Bailout? IMF Could Get Hundreds of Billions for European Banks

money-color.thumbnail.jpgThe bailout of private banks and financial institutions has become a touchy political issue in the United States, ever since President Bush’s Treasury Secretary and former Goldman Sachs CEO Hank Paulson asked Congress for a $700 billion dollar blank check last September.

Now the Obama administration is asking the Congress for $108 billion for the International Monetary Fund. This was in accordance with a plan that the administration has helped organize to raise $500 billion in additional funds for the IMF. This would add to the approximately $200 billion that the IMF has on hand, $100 billion in gold reserves, and another $250 billion that the Fund will create in its own currency. These are enormous sums of money that the IMF has never come close to before.

What is all this money for? There is an answer staring us in the face from the financial press: European banks.

It seems that Europe’s banks have gotten into a mess in their own neighborhood that is comparable to the “troubled assets” that our financial institutions accumulated in the course of the housing bubble – which they also shared. These banks had a fit of irrational exuberance in Central and Eastern Europe in recent years, with the result that they now have at least $1.4 trillion – and that is a conservative estimate – in exposure there to loans that are certain to have a very high default rate.

Most of the Central and Eastern European economies are in free fall right now. To make matters much worse, much of their borrowing from European banks was in foreign currency. This extended even to households: e.g. over 60% of Hungary’s mortgages are in foreign currency. When these currencies fall, as some already have, many of the borrowers – both businesses and households – are faced with unpayable debt burdens. Others, such as Latvia, are teetering on the brink of devaluation, which could set off a chain reaction in other countries, as well as mass insolvencies.

The exposure of European banks to the region is astoundingly large relative to their economies. Austria is off the charts with about 64 percent of GDP lent in Eastern Europe; Belgium and Sweden both have more than 20 percent, and Switzerland and the Netherlands are in double digits.

This is where the IMF comes in. (more…)