Two of the world’s more impenetrable governance systems — those of the International Monetary Fund and U.S. Congress — intersected last month, with sad consequences. In mid-January, U.S. legislators passed an annual budget for the first time in years, a welcome development after last fall’s partial government shutdown. But the 1,400-plus-page spending template excluded a $63 billion contribution that President Barack Obama’s administration promised the IMF more than three years ago. Despite what Treasury Secretary Jack Lew called a “full-court press” from the Democratic White House, the appropriation was blocked by Republicans, who control the House of Representatives. Kentucky Representative Hal Rogers, chairman of the House Appropriations Committee, told reporters that his party had acted to “ensure the responsible use of taxpayer dollars.”
Behind the scenes, the story wasn’t so simple, Washington hands and IMF watchers say. The Fund actually has the $63 billion, which Treasury loaned it in 2009 without the need for congressional approval. The loan, part of $360 billion in crisis capital the Fund raised globally at that time, expires in 2015. But it will probably be rolled over, not least because plenty of Republicans are pro-IMF. “If you take this funding mechanism off the table, you’re really damaging our cause in the developing world,” Lindsey Graham, the influential GOP senator from South Carolina, said after the budget passed.
The IMF appropriation likely fell victim to a narrower political gambit engineered by Mitch McConnell, the ranking Republican in the Senate, according to a report in Politico magazine that other insiders credit. McConnell wanted to abolish new rules that Treasury had written for the Internal Revenue Service restricting political activity by tax-exempt nonprofit groups, and he persuaded his party colleagues to hold the IMF funding hostage to this goal. Republicans were outraged last year by revelations that the IRS had targeted nonprofits associated with conservative causes for tax audits.
“The IMF funding did not fail on the merits,” says Edwin Truman, a former assistant Treasury secretary for international affairs and now a fellow at the Peter G. Peterson Institute for International Economics in Washington. “Certain Republican members used it as a bargaining chip, and the administration was unwilling to pay the price.”
Yet this backroom D.C. hardball resulted in “a major blow to U.S. credibility around the world, with ominous consequences for the future of international economic, financial, and political cooperation,” Truman stated on the institute’s website. To understand why requires an excursion into the IMF’s own intricacies. The Fund has plenty of money on hand, despite financial firefighting since 2009 on new frontiers like Greece and Ireland. Of the $360 billion advanced by shareholders postcrisis under the so-called New Arrangements to Borrow, $250 billion remains in reserve, the IMF says. But the new funding was paired with a governance overhaul meant to amplify the voices of China and other fast-growing developing nations at the Fund’s headquarters in Washington.
Ironically, this restructuring was pressed by the U.S. in 2010 and involves sacrifice by Europe, whose representation at the Fund reflects a global economy long past. China would become the IMF’s second-largest shareholder, with 6.4 percent of global “quota,” up from 4 percent. The four BRIC nations would increase their total share by about one third, to 12.9 percent. Western Europe, which traditionally holds eight of the 24 seats on the Fund’s board, would cede two.
The U.S. would be unaffected by the power shift, remaining the IMF’s largest shareholder, with a 16.75 percent quota. But Congress’s refusal to formally budget the country’s increased appropriation blocks the whole process, which requires approval by 85 percent of IMF shareholders.
Minute as the details may seem, the failure of the global financial cop’s internal reform has considerable diplomatic resonance. “This speaks very much to the legitimacy of the Fund if we want to be understood as an impartial voice,” says a senior IMF official. Yet the Europeans and emerging powers directly concerned have no plans for brokering a deal among themselves that would end-run Washington politics. “It’s hard for a finance minister of, say, the Netherlands to take the political pain at home if the U.S. refuses to close on its own deal,” the Peterson Institute’s Truman notes.
IMF managing director Christine Lagarde adopted a wait-and-see stance in a statement after the bad news from Capitol Hill. “We understand that the U.S. administration will continue to work on secu-ring the necessary legislative authorization, and we are hopeful that this will happen,” Largarde said. With Washington turning its attention toward November’s congressional elections, though, the window for compromise seems to be narrowing.