The boys from the IMF
George Szamuely
T do hope it won't become one of the 1 minor desks at the US State Depart- ment,' Keynes is said to have remarked upon the foundation of the International Monetary Fund. Whether it is a good or a bad thing that his fears have proved groundless rather depends on what purpose multilaterial financial institutions are sup- posed to serve. The IMF boasts of employ- ing the most rigorous economic criteria for solving problems, but also devotes a good deal of its energies to persuading us of the impossibility of looking to the market as the best means of raising loans. Not for the first time we find ourselves bludgeoned into believing that we are in the midst of a 'crisis' of terrifying proportions from which the only escape is to devote more resources to the very institution which had been smart enough to alert us to the coming catas- trophe.
The latest crisis is the one that involves the major Western banks who, for some reason best known to themselves, have brought us to a state of affairs where the ratio of outstanding bank loans to existing capital is about 30: 1. Consequently we are on the brink of economic ruin, the collapse of the world monetary order, and the end of civilisation. Most of us, I think will be tempted to dismiss such warnings and the people who utter them as the price we have to pay for living in a society which gives people so much leisure that they cannot pre- vent their minds from dwelling restlessly upon possible disasters. But when the IMF, that bulwark of the sternest capitalist effi- ciency, staffed by soberly suited men with fixed stares and determined jowls, warns us of apocalypse ... well, then perhaps we had better listen. Or perhaps we had better not.
During the last few years we have gazed with wonder at the boys from the IMF as they jetted around the globe, stopping off at exotic countries which had failed yet again to come up with the money to pay their creditors, but succeeding, nevertheless (always only at the very last moment) in ob- taining an agreement to reschedule the loan (in non-IMF jargon that means postpone- ment of payment). Or, failing that, the boys managed — again only at the very last moment —. to advance a loan to 'enable' these exotic people to pay the interest on their last loan, or perhaps only the interest on the interest on the last loan, or perhaps this was confused with the interest on the loan that paid the interest off on the last loan. These heroic efforts notwithstanding, the bemused observer will still insist on ask- ing: What on earth does it all mean? If his judgement is sound the conclusion he will come to is that we are being asked to part with our money. The first stage of this process is the at- tempt to persuade us that a most calamitous event must be avoided at all costs: a certain country, whether it is Brazil or Mexico or Argentina or Poland, must never be allow- ed to declare that it is defaulting on its debts. (Is it not strange that amid this fer- vent talk about starving people in the Third World being asked to pay dues to the rich, little mention is made of the fact that Poland and Yugoslavia are two of the worst debtors and between them owe more than $50 billion?) The very word 'default' is unmentionable for at the merest whisper of the term the streets of the West will resound to the stampede of the feet of a terrified populace charging to the banks to withdraw their deposits. Much more comforting words have to be used: rescheduling, recycl- ing, renegotiation, moratorium are employed, but not so frequently as to allow us to sink back into a pleasant drowsiness, for we must be shocked a little, just frightened enough to understand and con- nive in the devious game that the IMF is playing. We are to be made to believe that the debtor nations are in default and yet at the same time to believe that they are not in default for, after all, are they not continu- ing to pay the interest on the principal?
Now, you and I and the IMF know perfectly well that neither Argentina nor Mexico nor Poland has the slightest inten- tion of paying off its debts. But we have to keep up appearances, otherwise, as you know, civilisation ... A harmless enough exercise, you may think. Why not let the IMF boys have their first-class air fares, their stays at International Hotels, their ex- otic food, drink and female companions, their dramatic agreements on the stroke of midnight? If all it takes to ensure the sur- vival of our civilisation is for the banks to lend money to the IMF, get it back again and make believe that it came from Brazil, then the IMF's expense accounts are surely a small price to pay? It is now that the se- cond stage of that process whereby we are to be parted from our money comes into play. The interest payments cannot be made, cry the banks and the IMF in unison `Do you want seconds?' (not unnaturally echoed by the debtor na- tions themselves). When the loans were ex- tended, they explain, interest rates were very low and sometimes even negative; how was anyone to know that they would subse- quently soar? (Neither the banks nor the IMF nor the debtors will wish to remind anyone of the fact that only about 50 per cent of the debts are set at floating rates). And if the interest payments are not made then the debtor country is, effectively, bankrupt and given that everyone knows of the size of the debt compared to the total capital in the banks ... well, the doors of the bank will not be strong enough to hold the crowd back.
What the banks are after are government guarantees that they will not be allowed to go under. Direct intervention by the state frightens them: at best they will have governments supervising their esoteric activities, at worst they might be nationalis- ed. But the IMF is just what the doctor ordered. Not quite 'a minor desk at the State Department', it is yet close enough to the US government to offer counsel which, coming from so impeccable a source, can hardly be rejected. Created at Bretton Woods for the purpose of lending money to countries having difficulties in maintaining their exchange rates the IMF had somehow lost its way once fixed parities were aban- doned. But this did not deter it from in- creasing its lending. From 1970 to 1975 its volume of lending more than doubled, from 1975 to 1982 it further expanded by 58 per cent. The IMF has suddenly emerged as a 'lender of last resort' — the people you go to when you can no longer get credit from any reputable bank. It has succeeded in frightening governments into increasing their subventions to it by whispering in their ear that dreaded word ... default.
But ought we to be as terrified as all that? After all, if a country declares itself bankrupt it is liable to have all its foreign assets impounded, its export revenues seiz- ed and its credit proclaimed useless. But let us assume that, although it may not be in the interest of any country to do so, follow- ing a seizure of power by radicals, it repudiates all its debts. Suppose also that this does cause a run on the banks. Then as long as individual depositors are insured (as is at least the case for deposition of less than $100,000 in the United States) there is no particular reason to worry about the fate of the shareholders or the management of any of the banks. They will only be penalised for their own incompetence. Nor will the collapse of any of the major banks mean that money to finance economic activity in the rich countries will cease to be available. The national monetary authorities can easi- ly step in and maintain the level of money supply necessary to keep production and consumption going. Not a very cheerful prospect perhaps but at least it avoids all the inflationary consequences of financing the banks. The boys from the IMF, who have a vested interest in perpetuating the activity of rescheduling, will, of course, at- tempt to persuade us otherwise. But then they would, wouldn't they?
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