Though it’s flown below the radar at bit, there has been an interesting battle shaping up over a supplemental appropriations bill that is now making its way through Congress. The bill, which provides over $100 billion to fund the wars in Afghanistan and Iraq, passed both houses of Congress.
However, the Senate version of the bill contained a provision missing from the original House bill - $108 billion dollars in extra funding for the International Monetary Fund, part of a commitment by the wealthy countries to provide the Fund with over half a trillion dollars in new assets to assist in a global bailout. Because the two houses passed different versions of the bill, a conference is required to reconcile the differences before each chamber re-votes on the measure (a little bonus civics lesson for you all).
The House/Senate conference on the supplemental kept in the provision for IMF money. And that’s where the fun began, because a combination of (the largely hypocritical) GOP delegation in the House and some anti-war liberals is poised to kill the supplemental as long as the IMF money remains in the bill.
As the Hill detailed this morning, these supplemental war bills have been used before to push through stuff that has nothing to do with the wars we’re fighting. And folks like Atrios are right to be annoyed that, in the past, when Democrats voted against these bills the media accepted the GOP narrative that “no” votes were somehow anti-troop or anti-American or whatever.
The Obama administration says the IMF money is necessary to help stabilize a still-precarious global economic situation. In his original request to Congress in April, President Obama said:
“Rapid progress is essential to the restoration of confidence in the global economy and financial system so that the global economy can emerge from recession to recovery and to sustained growth.”
And some progressives, like Matt Yglesias and the Center for American Progress have echoed President Obama’s exhortation in support of the additional IMF money.
But Republican hypocrisy aside, and leaving aside the merits of our “supplemental” war expenditures, there are good reasons to be skeptical of rationale behind the IMF funding.
The President told Congress that extending the money to the IMF would not require any net outlays by the US, because we would, in effect, be lending the money to the IMF. In return, we would receive an equivalent amount from the IMF in that organization’s own currency, called Special Drawing Rights. And it’s true - this is not a $100 billion net expenditure.
But it’s not exactly free either. The bill before Congress includes a $5 billion outlay because, according to Dean Baker in an email to me, that is the expected difference between the costs to the US of borrowing the money it will lend to the IMF and the value of the assets it will receive back.
$5 billion is not alot of money, but accounts that paint this as a cost-free financing mechanism appear to be mistaken.
Far more importantly, there are real questions to be raised about whether this IMF funding is as benevolently-intended as its proponents suggest. Baker’s colleague at the Center for Economic Policy and Research, Mark Weisbrot recently noted that this funding really amounts to a backdoor bailout of European banks:
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.
…
This is where the IMF comes in. In the United States, we have not only the $700 billion TARP bailout, but more than three times that amount, which has been dispensed by the Federal Reserve. The Fed has been used because it is non-transparent and unaccountable to Congress – unlike for the TARP, where Congress attached some rules for accountability, the taxpayers do not even know who has received the more than $2 trillion on the Fed’s balance sheet.
For various reasons, the European Central Bank is not going to play the role that the Fed has played here. (The Fed itself has recently been hit by strong demands for more transparency, with 186 Members of Congress sponsoring a bill that would require it to be audited by the Government Accountability Office). The European banks are therefore counting on the IMF to help save them from the costs of their bad decisions.
The Obama administration has argued that the money is necessary to help provide a global stimulus, and to help poor people in poor countries. But the facts do not support this claim. Almost all of the agreements that the IMF has concluded since the global economic crisis began have included the opposite of stimulus programs: for example spending cuts or interest rate increases. The amount of money that will help poor countries is tiny. And it is difficult to see why the IMF would need hundreds of billions of dollars to help governments with balance of payments support: for sixteen Standby Arrangements negotiated since the crisis intensified last year, the total has been less than $46 billion.
On the other hand, European banks are facing potential losses in the hundreds of billions of dollars. Some, like France’s Societe Generale, have already gotten billions of dollars from the TARP bailout. If the purpose of adding these vast sums to the IMF’s coffers is to bail out these banks, then the taxpayers of the United States (and other countries who are being asked to contribute) ought to know about it.
And Baker piled on this morning, criticizing a piece on NPR that misleadingly framed the IMF funding as assistance to poor countries:
The basic problem is simple. The West European bankers proved to be every bit as stupid as the Robert Rubin-Citigroup crew in dishing out loans. The main outlet for their bad loans was Eastern Europe, where they made enormous loans denominated in euros.
It is very difficult for the countries of Eastern Europe to maintain their exchange rates against the euro without large amounts of assistance. However, if they let their currencies fall against the euro, then the default rates on the loans from Western European banks will explode.
Of course West Europe is rich enough to bail out its own banks, but the governments in countries like France and Germany know that their people will not stand for this sort of handout. In steps the IMF, with a big assist from NPR, which managed to not even mention East Europe in the piece.
In recent months, the IMF - after a decade of rapidly declining influence - is promising to change its ways. The Fund has vowed to return to its originally mandated role of helping countries with short-term fiscal emergencies without imposing the structural adjustment programs that made it so hated throughout the developing world from the 1970s onward.
But with the IMF back, and seemingly bigger than ever, there are reasons to be skeptical that it has changed its ways:
The IMF is expected to lend the Baltic, central European and other debtor-country governments money to pay them. These hapless debtor economies are then to follow IMF “conditionalities” to squeeze enough money out of their populations to pay foreign creditors – and repay the Fund by imposing yet more onerous taxes on their labor and industry, making them even more high-cost and therefore pushing them even further into trade and credit dependency. This is why there have been so many riots recently in Latvia, Lithuania, Estonia and Ukraine, as was the case for so many decades throughout the Latin American countries that introduced the term “IMF riot” to the global vocabulary.
The term “creditor’s cartel” came into widespread usage in the 1980s, when the global debt crisis threatened several Latin American countries with bankruptcy, and arrangements were made, on terns highly favorable to Western banks to make sure that those debts were re-paid, with horrific consequences for many folks in Latin America itself. The IMF played a key role as a hand-maiden to those creditor interests and the governments behind them. Obama added the IMF funding to the military appropriations bill because he lacked confidence that it would pass on a straight up-or-down vote (a strategy which seems to be backfiring). And the GOP’s reasons for opposing the IMF funding are the usual drivel, such as concerns about the money falling into the hands of our enemies.
But this IMF appropriation bears all the hallmarks of what’s been wrong with our approach to the financial crisis more generally - preferential treatment for the wealthiest interests, a lack of transparency or honesty about the purposes of the funding, and back-door sleight-of-hand to funnel massive sums of money to those wealthy interests, while ordinary folks are being asked to tighten their belts.
It’d be nice if the world’s wealthiest banks weren’t always first in our thoughts.
Tags: Bank Bailout, Eastern Europe, IMF