The temptation to policy makers from an oversized IMF
Letter to the Editor

Article Highlights

  • Lachman: IMF reform is needed, not an increase in IMF lending

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  • Do we really need to double the size of the IMF?

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  • Lachman: A larger IMF means more moral hazard in the system

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Sir, Your editorial “America’s cavalier stance on the IMF” (March 18), urging the US Congress to approve President’s Barack Obama’s proposal to link US bilateral Ukrainian aid to International Monetary Fund reform, failed to make the crucial distinction between the need for IMF governance reform and the need for a larger IMF. While IMF governance reform is certainly long overdue, the case for an approximate doubling in the size of the IMF is far from clear cut.

The G20’s agreement in December 2010 to substantially increase the size of the IMF was made in the midst of the European sovereign debt crisis. It was also made at a time when Europe did not have in place the mechanisms to handle that crisis itself without massive IMF financial support.

Since that time, Europe has put in place a €500bn permanent European Stability Mechanism (ESM). More importantly yet, in September 2012 the European Central Bank introduced its Outright Monetary Transactions (OMT) programme. That programme allows the ECB to buy unlimited amounts of a member country’s government bonds with a maturity of up to three years subject to that country having agreed to an ESM economic adjustment programme.

Now that the IMF no longer needs to play the principal financing role in the European sovereign debt crisis, it is not obvious why the IMF still needs a very large expansion in its resources. Currently the IMF has more than $400bn in unused loanable resources. That should be more than adequate to finance not only Ukraine but very many more future cases similar to that of Ukraine.

The IMF itself now recognises that it was a mistake for it to have proceeded with an extraordinarily large bailout programme for Greece in 2010 without first having insisted on a restructuring of Greece’s privately owned sovereign debt. The danger of having an oversized IMF is that not only might this induce moral hazard in the system but also it might tempt policy makers to again unnecessarily bail out private bondholders with international taxpayers’ money.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

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