No time to wait
Simon Johnson is a former chief economist at the International Monetary Fund and is currently a professor at MIT and a senior fellow at the Peterson Institute for International Economics. Reuters is not responsible for this content and any views expressed are the author’s alone.
Senator Barack Obama won the presidency on Tuesday and comes to Washington in January. But before he even takes office, leaders from around the world descend on Washington November 15th for a Group of 20 summit to tackle the global financial crisis.
The US is saying that a statement of principles (or is that platitudes?) and the establishment of some working groups would constitute success. The Europeans, particularly Messrs. Brown and Sarkozy, want to establish a process that moves towards some sort of new international financial/economic system (“Bretton Woods II” is the jargon), although they are still quite divided on what this would mean in terms of regulation for financial institutions or – the key point – capital flows. The emerging markets, who will be very important participants, are not yet putting their cards on the table.
There is another, more pressing potential agenda item currently being discussed (mostly behind closed doors). While this may not to come to the forefront in public discussion, as markets are now relatively quiet, if there is a major downturn in sentiment or if the news about the real economy in the US and elsewhere is sufficiently dire, this issue (and all that goes with it) may well find itself right in the middle of the negotiating table – perhaps as early as the G20 finance ministers and central bank governors meeting in Brazil this weekend. (Remember: this meeting used to the culmination of the annual G20 process; the heads of government meeting is an innovation, and really needs to deliver something out-of-the-ordinary in order to be worthwhile.)
Here is the main item on the shadow agenda: the IMF needs a lot more money.
The powers-that-be (read: US, UK, France; probably not Germany) have over the past week or two made their approach to the globalization of the crisis clear – they want the IMF to fund continuing growth in emerging markets. In the age-old choice between “adjustment” (tight money, painful fiscal contraction, etc) and “financing” (borrow more) to deal with external payments problems, the G7 and their friends would like the emerging markets to finance, big time. This will keep world growth higher and thus keep the G7 (and their banks) from getting into even deeper water.
It’s risky, of course, because global deleveraging – the big contraction in global credit that is likely already underway – means lower asset prices, including lower commodity prices, and most likely a reduction in global growth for the foreseeable future. Cushioning the blow is fine, but commodity exporters need to do some adjusting and all emerging markets may need to cut back, to some degree, in order to keep things sustainable. And someone (in or around the IMF) has to decide how much growth in emerging markets is “right” for this situation.
In particular, in the global strategy we now see forming, a key issue for sizing IMF (and related) resources is credit growth in emerging markets. This has been high, fuelled in part by loans taken out in foreign currency, i.e., borrowing from abroad. The effects of this now, in terms of slowing growth, are most obvious in East-Central Europe, but are beginning to be felt in many emerging markets. The private sector is cutting back on its lending to emerging markets. How much does the IMF want to step up and fill this gap? The publicly available information on the Hungarian program suggests an answer: a lot. (The final program details will likely be published early next week, then we can run the numbers properly.)
Now, there are many options for increasing the resources for IMF programs, including the funds that it brings as a so-called catalyst (this could be from the European Union for EU members like Hungary, or from other countries/groups on a case-by-case basis). But given the nature of this crisis, it would be good to announce at least some of the resources that are available. Among other things, this would signal the scale of further monies that would be made available if needed.
The IMF has $200-250bn in available resources. They put $100bn into what we are calling their Express Boarding Lane (i.e., keep your policies basically are they are; have some money). About $50bn are probably already spoken for, in lending to about half a dozen confirmed and likely customers. Clearly the remaining $100bn is not enough for the rest of the world, particularly if the idea is to help finance continued high growth, rather than force painful adjustment.
How much is enough? That is not the right question. The right question is: how much would convince the market that the IMF can draw on the essentially unlimited pockets of the G20, in order to achieve just a gentle slowdown in world growth. Clearly $50bn would not do that, and I doubt that $100bn could now be decisive. I’ve floated $1trn (trillion, with a “t”) as a plausible amount, around which to open discussion. Unoffficial reactions to this so far have been positive, but let’s see what we hear officially.