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Behind the failure of the IMF

December 15, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Along with hedge fund manager John Paulson, the International Monetary Fund was perhaps the biggest winner from the global financial crisis. By the start of 2007 the IMF appeared to have lost its role as the world’s lender to crisis-ridden countries. With no demand for its emergency loans, nobody was particularly interested in the fund’s opinions either. The assumption was that it would become little more than a glorified think tank.

Now the fund is back on the ascent.

This is largely undeserved. The IMF failed to predict the financial and economic meltdown. As late as April 2007 the fund’s army of economists claimed that the damage from the brewing sub-prime mess would be contained. Indeed they suggested that it would not produce losses at the big U.S. banks. In addition, the fund’s chief economist — the otherwise excellent Simon Johnson — memorably declared that the financial tail would not wag the economic dog. The fund’s later attempts to claim they spotted the problems are unconvincing.

The question, is can the fund do better next time? The IMF can certainly be useful as a lender. Markets may be calmed by the knowledge that the IMF is there to provide finance to struggling nations. It can also serve a useful role in imposing some discipline on spending.

There is no denying that the IMF has improved markedly under Dominique Strauss-Kahn. The former French finance minster has increased the focus on financial analysis — a longstanding weakness of the fund — and updated the lending structure. He has also succeeded in shifting greater voting power to fast growing developing countries.

But the IMF will always struggle to serve as an early warning system. It is too beholden to its member states — all 187 of them — and is extremely reluctant to embarrass them. This applies double to the United States, which has veto power over many of the fund’s decisions. Diplomatic pressures make the IMF cautious. Managing  directors are fearful of creating turmoil in financial markets.

The IMF’s remarkable Lazarus-like recovery should promote financial stability on the margin. But we should not expect it to serve as the Nouriel Roubini for the next financial crisis. Chances are it will be behind the game as usual.

Photo caption: The International Monetary Fund logo is seen during a news conference in Bucharest March 25, 2009. REUTERS/Bogdan Cristel


Dear Sir.

I have a question.

Why does a set up as IMF is needed in the first place?

To help struggling countries and developing countries with loans. Correct?


Why would or should a well runned country that cares for its citizens and its growth and its future at some point need such loans?

it seeems to me that such country where 1+1=2 and have policies in place where what they budget to spend, they earn via taxes etc, should be OK.

On the other hand, countries like Greece, portugal, ireland, Spain, Italy and others alike where their problems are deep and old, they are bound sooner or later to need a bail out and large amounts of money to keep them afloat which means that:

Current loans: 300B plus interest
New loan 300B plus interest in order to pay the above first loan

Therefore, the country still owns 300B plus higher interest and the economy in a mess, where they will go back to the market to borrow more later in order to bridge their budgets as their economy is negative and their income as a government is less and the pay outs in unemployment insurance and pension is growing by the day.

Therefore they will need more loans again until they are bankrupt.

If this is a solution by the great economists of the world then we should all go home now.

The world and its people need a balanced life which is in a secure enviorement and with a safety net when they grow old and dont work any more and they should also take care of themselves in order to need less health care later on.

What good is it if you smoke for 40 years and then at 85 you decide to stop smoking? What can be done for such person at this late stage?

Except of India and China, the rest of the world is over weight. think about it.

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