by MONA ALI
The mood at the International Monetary Fund-World Bank Spring Meetings 2023, according to Richard Kozul-Wright (Director of the Globalisation and Development Strategies Division at UNCTAD), was decidedly more upbeat than it had been at the last meeting in fall 2022. ‘The outlook is reasonably bright’ stated Janet Yellen, the US Treasury Secretary. Despite what IMF economists had described as a dangerous global debt burden last year, the urgency of dealing with it — according to Kozul-Wright — seemed to have dissipated. On Friday morning, the entrance hall of IMF Headquarter 2 was filled with music. Kristalina Georgieva, the IMF managing director, closely accompanied by security guards, clapped in enthusiasm in front of the Moroccan singer. A week earlier, the Kingdom of Morocco, host of the forthcoming autumn meeting in Marrakesh, had been granted a $3 billion precautionary line by the IMF. At the G-30 meeting, nested within the spring meeting, the keynote address by the American economist Jason Furman was devoted to discussing inflation in the US. He did not discuss global debt in which G-30 initiatives had played a leading role in the last couple of years. When asked about the effects of the dollar, Furman said that the world was very dollarized and that he actually didn’t care that much. He explained that a structurally appreciated exchange rate conferred costs not only on the rest of the world but on the US itself. He repeated that he didn’t care quite so much as he should were he a finance minister.
A month earlier, in March 2023, it had taken just a week for the US Federal Reserve to expand its balance sheet by $300 billion. Following the run on Silicon Valley Bank, the Fed provided emergency lending which involved setting up a brand-new bank lending facility—one that accepted US treasuries at their face value (higher than their market value) as collateral against dollars for cash-strapped financial institutions. The US central bank provided assurances that even the uninsured deposits of SVB (above the FDIC’s standard insurance limit of $250,000 per depositor) would be made whole. As the banking turmoil spread across the North Atlantic, affecting the balance sheets of the Swiss bank Credit Suisse, the Fed reactivated its international dollar swap lines. Meanwhile in Europe, Swiss authorities wrote new amendments into existing law which enabled them to structure the terms and conditions of UBS’s merger with Credit Suisse. A public liquidity backstop was arranged for UBS which had acquiesced to absorb Credit Suisse.
The elasticity of liquidity and legal constraints that characterizes the apex of the global financial system finds its mirror opposite in the rigidity and discipline enforced in IMF loan programs. The expedited financing provided to institutions in the North Atlantic stands in stark contrast to the encumbrances that low- and middle-income economies encounter when seeking funding from the International Monetary Fund. The average length of time between staff-level agreement on an IMF loan program for a country in need of emergency lending and the IMF’s executive board’s approval, which is required for loan disbursement, has increased from 55 days to 187 days. While the interest rate on the Fed short-term lending swap-facility is typically 25 basis points above the benchmark OIS rate, IMF lending via its extended fund facility for middle-income countries can include additional fees that are 200 – 300 basis points on top of the market-determined SDR interest rate. These surcharges, according to the IMF, are ‘designed to discourage large and prolonged use of IMF resources.’ Comprising a bit less than half of its annual income (around $1.6 billion) these penalty fees have become the leading multilateral lender of last resort’s single-largest source of revenue.
If countries do not meet the structural reforms spelled out in the IMF’s program review, lending can come to a halt. The IMF loan program may not be renewed. The Fund’s new policy regarding lending in ‘situations of exceptionally high uncertainty,’ which has enabled its recent $15.6 billion lending package to Ukraine, presents an exception to the IMF’s general rule against lending to countries whose debt is deemed unsustainable. However, it seems doubtful that this new allowance will reorient IMF lending away from fiscal consolidation (read: austerity). For now, IMF lending to the lower-middle-income country appears to be in keeping with its stringent conditionalities for borrowing countries.
The recent American and Swiss bank bailouts reenact the Mario Draghi ‘whatever it takes’ imperative: insulating a bank whose clientele were primarily the financial elite (the tech entrepreneurs in Silicon Valley) from failing on the grounds that it would present a ‘systemic risk’—even though SVB wasn’t a globally ‘systemically important’ institution like Credit Suisse. In a frank if unwitting admission, a recent IMF report clarifies that ‘systemic debt crisis’ are ones that threaten the solvency of large, private interconnected creditors. In this framework, distressed low-income countries—home to 700 million people that experience extreme poverty—simply don’t matter much.
Should the liquidity crunch devolve into financial contagion, the typical Group of 77 member central bank can’t draw upon dollar swap-lines with the New York Federal Reserve as can the central banks of the Group of 10 nations. G-77 members (a group of 134 developing economies) must draw down their hard currency reserves or, at the Fed’s discretion, borrow dollars by posting US treasuries as collateral at the Fed’s FIMA repo facility. Borrowing from the FIMA repo facility is more expensive than borrowing from the Fed’s swap facility or on the repo market. (Unlike repos, swaps inject new liquidity, expanding bank balance sheets—the elasticity effect.)
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