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."