The once-creaky International Monetary Fund burst back onto the scene last month, unleashing a cascade of country loans and pulling together a new $100 billion liquidity facility in record time. “Three weeks is usually the amount of time we allow just to circulate a memo to the executive directors,” says a weary-looking Reza Moghadam, director of the strategy policy and review department at the Fund. A global credit crisis shredding countries’ balance sheets can speed things up, though. How did the staid agency switch gears so fast? “No sleep,” Moghadam quips.
Facing obscurity less than 12 months ago after years of relative inactivity, the IMF — criticized in some countries for the painful structural reforms and strict financial adherence it has historically demanded — is back in business. And as the credit tsunami engulfs smaller industrial countries and leaves emerging markets scrambling for capital, the Fund, which trimmed 15 percent from its workforce earlier this year, is eager to show it’s lean, flexible and quick to respond.
This rapid-fire deal making was on display last month, when the IMF negotiated a deal with Iceland in two weeks, giving the country access to $2.1 billion in standby credit. Just days later similar agreements were announced with Ukraine, for $16.5 billion, and Hungary, for $15.7 billion. IMF officials are in preliminary talks with Belarus, Pakistan and about a dozen other countries.
In addition, on October 29 the Fund unveiled a short-term liquidity facility that will make as much as $100 billion available to countries with good policy track records. Any member country may borrow up to five times its IMF quota up front, without conditions or monitoring, for a period of 90 days; such a loan can be renewed twice within the same year. The Fund has $200 billion available and an additional $50 billion it can borrow through standing arrangements with members.
This facility marks the first time the IMF is dispensing with its practice of slapping conditions on short-term loans. Even with the more traditional standby credits, it has eased the terms for borrowers by focusing on targeted conditionality. “The conditionality has to be directly linked to the need of the program to be a success,” IMF managing director Dominique Strauss-Kahn said at a press conference. The Fund learned a lesson about attaching rigid conditions to its loans from the negative reaction to its intervention in the Asian crisis in the 1990s, he added.
Strauss-Kahn has also had to put out a fire of his own. In mid-October, during some of the darkest days of the crisis, the Frenchman suddenly became the target of an investigation into whether he had abused his position after he admitted to having had a brief affair with a female subordinate, economist Piroska Nagy. The Fund’s board hired an outside law firm to investigate the matter and concluded that Strauss-Kahn had not harassed Nagy or given her preferential treatment; she accepted a severance package as part of the IMF cutbacks during the summer and now works at the European Bank for Reconstruction and Development. But the board criticized Strauss-Kahn for an error of judgment.
Whether the Fund’s rebirth will be enough to pull teetering countries back from the brink remains to be seen, notes Desmond Lachman, an economist at the American Enterprise Institute. “They didn’t do nearly enough with the G-7 countries while the crisis was brewing,” says Lachman, a former deputy director of the IMF’s policy department. “They totally missed the crisis every step of the way, putting out one sanguine report after another.”
Moghadam says the Fund will be involved in the Washington, D.C., summit of 20 leading economies in mid-November. France and the U.K. are pushing to enhance the IMF’s role and authority as part of a broad revamping of the global financial infrastructure.
