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Monday, 12 May 2014

IMF and bank creditors: Who's in charge when a country can't pay?" and "Stabilising an unstable world: Is there a better future for international finance?

Jack Seddon (St John's College, Oxford)

Dr. James Boughton, the former official historian of the International Monetary Fund and current CIGI Senior Fellow, shared his experience with PEFM through two presentations addressing the following topics: first, "IMF and bank creditors: Who's in charge when a country can't pay?"; and, second, "Stabilising an unstable world: Is there a better future for international finance?"

Addressing the question of who's in charge, Dr. Boughton provided a fascinating account of an "un-holy" trinity – to paraphrase Cohen's apt portrayal of the Mundell-Flemming trilemma – that have competed to shape the international community's responses to countries facing payments problems. The trinity comprises the IMF, the US Treasury and other bilateral official bodies and international banks and bond holders. While these players share a common interest in wanting to see the country in trouble recover and repay its debts, Dr. Boughton eruditely showed how their particular preferences will differ. In particular, he showed how bilateral creditors must respond to strategic and political considerations that will not concern the private sector, while the IMF is beholden to its mission and various stakeholders in sometimes unobvious ways.

In line with what Krasner taught us, Boughton argued that - when there are many points on the Pareto frontier - the relative power of actors will determine the outcome. On this, the story was fascinating. From Mexico in 1982 to Costa Rica in the late 1980s, to Asia and Russia in the late 1990s, and into Southern Europe today, a series of strategies and devices have been deployed by creditors to gain leverage over each other. After Mexico, for instance, the banks built up their reserves and declared that they weren't going to play ball. The Fund facing a situation of "reverse leverage" lent into arrears in Costa Rica and rebalanced the table. Then, in the tequila crisis and even more so in Asia, the heavy footprint of the US Treasury arrived on the scene. The stage was thus set for the Troika and the management of the European sovereign debt crisis, where the tussle has continued with dubious implications from a public policy perspective.

The analysis gives reason to reflect on a few points. What is the position of debtors in this story? Are they better or worse off in confronting multiple creditors? More generally, what are the systemic implications of this cycling of creditor interests? Without consistent rules, it seems that there is little chance of countries being treated equally, even when they have similar problems. Moreover, solutions will naturally take longer to coordinate. Surely, also, panics and runs are more likely when anarchy rules and first mover advantages can be so crucial. Is it time to reconsider the idea of a more independent or juridical body – something akin to an international bankruptcy court – to help when countries are in crisis?

This final remark leads into the second presentation, as Dr. Boughton made a powerful case for the IMF to step out from the shadows of crisis management and to perform the task for which it was originally intended: managing global imbalances and policy conflicts between countries at the centre of the international monetary system. More specifically, Dr. Boughton argued that the answer to a better future for the international financial system may lie in the past. It is not uncommon for the current international monetary and financial system to evoke Martin "Marty" McFly prescriptions. In light of recent events, it is hard to see how things could be going worse. There is a natural sense of nostalgia for the growth and price stability of the post-war era, particularly in the West. However, is this first stop shop the best place to look for answers to current financial problems? Can we go "back to the future"?

On the question of macro-performance, the answer surely must be that we should be striving for something more-like the post-war order, in light of the challenges of globalisation, industrialisation, climate change and growing interdependence. Yet the post-war system, particularly in the 1960s, spent much of its time lurching from one exchange crisis to the next. The process of systemic adjustment and recalibration was forced on reluctant states by the markets. I am therefore less than optimistic that answers as how the IMF can come to perform the "policeman" (my clumsy expression rather than Dr. Boughton's) role for the system might be found in this period. A final thought regarding the connection between the problems addressed in the two talks. Arguably, the IMF has been performing the fire-fighter role for so long that this is where its particular organisational expertise lies. Can it change its organisational gearings? This won't be easy, particularly as the world's major powers are most comfortable with it playing the role of crisis manager. Moreover, the private sector has got used to the IMF in this position – perhaps too used to it. This brings the analysis full circle. Bail-outs create a moral hazard in the system that downstream leads to the need for fire-fighters not policemen. The question is how to break the cycle. For the time being, chronic governance problems seem set to continue to afflict creditors, debtors and the system itself. Dr. Boughton's talks helped me to understand these problems better.

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