IMF bailouts get mixed press as next aid nears

IMF bailouts get mixed press as next aid nears

WASHINGTON (Reuters): The International Monetary Fund has had a mixed press this year, damned for encouraging investors to throw caution to the winds but praised for preventing the possible meltdown of the global economy.

Some analysts say big IMF loans to Thailand and the Philippines, and now a promise of help for Indonesia, are helping the region weather an economic storm caused by a damaging currency crash and a dangerous shortage of cash.

But others say the mere fact that the IMF is stepping in to bail out troubled countries means that investors have stopped adequately weighing up the economic risks, which is often referred to as the "moral hazard" involved in international financial rescues.

"International banks and financial institutions are now more certain that the IMF provides a safety net protecting them from some or most of their losses," Allan Meltzer, economist at the Carnegie Mellon University told a conference at the libertarian Cato Institute this week.

"The risks remain, indeed they are increased, by moral hazard. But some of the losses are shifted to the taxpayers in developed countries who supply the capital that the IMF mismanages."

The IMF, hardly surprisingly, sees things in a different light. It wants the private sector to help with bailouts, but admits there is as yet no mechanism for this to start.

"The hazard is that the private sector may be too willing to lend because it knows that a country in trouble will go to the fund rather than default," IMF First Deputy Managing Director Stanley Fischer told the same conference.

"The international system needs to find a solution to the moral hazard problem posed by private sector international lending to governments, a solution that ensures that the private sector shares in the financial costs of dealing with crises."

The IMF, helping to ease a liquidity crunch, contributed $3.9 billion to a $17.2 billion bailout for Thailand in August. It was the biggest aid package since the international community made almost $50 billion available to Mexico in 1995.

It is now talking to Indonesia about a loan package there, although Fischer said it was too early to say how much money would be offered to Jakarta, which is already following the type of economic program the IMF is likely to recommend.

The issue of helping countries has taken on more urgency as capital moves across frontiers to take advantage of high returns, and moves out again once the going gets tough.

U.S. Treasury Secretary Robert Rubin, whose department put together Mexico's financial rescue, has voiced concern that investors are being let off too lightly.

"Investors, too, should be subject to the discipline of risk and that is an issue not yet fully solved in these support programs," he told a conference in Seattle last month.

However, U.S. Federal Reserve Chairman Alan Greenspan said this week it would be wrong for countries simply to impose capital controls to deal with the problems.

"The resort to capital controls to deal with financial market disturbances of the sort a number of emerging economies have experienced would be a step backward from the trend towards financial market liberalization and, in the end, would not be effective," he said.

Some analysts said a more transparent financial system and more flexible exchange rates would help reduce moral hazard, the idea that companies that made mistaken investments had no need to worry because a bailout was inevitable.

Adam Posen, an analyst at the Institute for International Economics in Washington, said these costs were small compared with the threat caused if a financial crisis spread across borders or caused political problems.

"If I am sitting there in a central bank or the IMF and there is a real external threat -- the major decline in a country's exchange rate like in Indonesia or huge social or political spillovers like in Mexico -- the costs of bailing them out will be in second or third order," he said.

"If we believe there are banks that are too big to fail, there are also countries that are too big to fail."