Economics - General

The future of the current round of IMF Loans

Businessweek reports that the members of the G20 “…will pledge funds ‘more than doubling’ the amount the IMF initially sought to $750 billion.”  Bloomberg reports that “In the past six months, the fund has approved $16.4 billion for Ukraine, $15.7 billion for Hungary, $10.4 billion for Latvia, $2.5 billion for Belarus, $2.1 billion for Iceland, $7.6 billion for Pakistan and $516 million for Serbia.” 

One question is, what is the nature of a loan from the IMF?  It is not a contract between individuals or firms.  It is not a contract between governments and banks.  It is a contract between one government and another.  The politicians of developing countries are agreeing to pay back the loan in the future.  Unfortunately, while the promise of current politicians to pay back the loan may be made in good faith, this does not imply that future politicians will uphold their end of this bargain.  Future politicians in the developing world will claim that the West is imposing an undue burden upon them with these large loans.  Bono has been arguing for debt relief for developing countries for many years now. 

The book The Bubble that Broke the World chronicles the history of World War I reparations.  Germany could not afford to pay for reparations.  Germany then took out loans from the U.S. to pay for these reparations.  Germany then claimed that the reparations (and the loan) imposed too much of a burden and wanted to default.

We see that throughout history, loans between countries do not work out as intended.   There are better options than offering loans to these developing countries.  One option is that the developing countries could get loans directly from banks or issue bonds.  Although the foreign countries would pay higher rates then would be the case than if the loan was backed by the IMF, it would be free of the political taint of the burdonsome IMF loans.  With loans made from bankers, developed countries would have a responsibility to pay back the loan to creditors or else stigmatize their country to investors and thus face increased interest rates for many yeas to come.  

If the developed countries really want to help developing countries, they could just give them the money.  One should not think of loan as aid.  Bankers certainly do not.  

If the G20 wants to help developed nations, they should give them money.  If they would rather spend money on domestic issues, that is fine as well.  However, offering loans is a disingenuous way of ‘helping’ the developed world.

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