Macro and Markets

The debate over congressional passage of IMF reform has reached a critical juncture. The Senate Foreign Relations Committee  today approved legislation providing loan guarantees for Ukraine and supporting sanctions, and the bill includes language implementing the long-delayed IMF reform. Assuming passage by the full Senate, the debate next moves to conference, where both sides will need to step up and negotiate in good faith. In her companion piece on this blog, Heidi Crebo-Rediker makes a compelling argument that there are significant geo-strategic benefits from this legislation.  There are meaningful economic benefits as well that make it important to reach a deal. The economic case for IMF reform There is sometimes the mistaken view that the bill is only about expanding the lending of the IMF. It is not. The package would double IMF quotas, replacing temporary commitments made during the financial crisis (New Arrangements to Borrow, or NAB). But the overall level of Fund’s usable resources would increase only a very small amount, on the order of $15 billion (current unused lending capacity is around $400 billion), with increased resources coming primarily from the large emerging markets. Quotas will be larger, and arguably the Fund’s resources will be more permanent; lending programs might rise over time as a result.  Ted Truman today has an excellent summary of the legislation and the Fund’s reform package. Does the Fund even need this level of resources? Desmond Lachman, for example, has three reasons why the Fund does not need the money: -Europe now has crisis mechanisms in place and so the Fund will not need to lend in such large amounts to periphery countries in the future; -there has been a backlash against the IMF in Europe, further reducing demand; and -large lending programs create moral hazard--countries don’t implement needed reforms--and debt overhangs. These are serious concerns but on balance I am not convinced. His first point relies on the establishment of the European Stability Mechanism (ESM) and the ECB’s ability to buy bonds (OMT). But the ESM is limited in size, with a very limited ability to directly recapitalize banks without burdening national balance sheets. I further doubt that the OMT will ever become operational. One can take the view that Europe would do the right thing in crisis and change their rules, but I see a European economic union that is far from complete and vulnerable to renewed crisis. I am more comfortable with the Fund involved and providing a backstop. I do agree there has been a backlash to recent Fund programs in Europe, and moral hazard (by both creditor and debtor) will always exist, but there will still be cases of national and systemic shocks where we will nonetheless find it necessary to provide extraordinary support and smooth the needed adjustment. The broader issue is that the reform package does much more that. The reform includes significant governance changes--representation and organizational--that addresses the concerns of rising economic powers who feel the IMF does not adequately reflect their voice and their contribution to the institution. This agreement provides them a greater voice at the Executive Board (primarily at the expense of the major European countries). By doing so, it ensures stronger support over the longer term for the Fund. While we can find much to criticize in past Fund programs, it remains the principal institution for international economic cooperation, and leverages U.S. economic and security interests. Why now—does Ukraine make the case? The current situation in Ukraine underscores the argument that a strong IMF advances U.S. interests. With the crisis deepening, the international community will look to the Fund for leadership, reform, and a lot of money. The IMF has the resources to lend to Ukraine, a point emphasized by my colleagues Dinah Walker and Benn Steil. Still, there are practical ways in which legislation would provide important support to Ukraine. This is the core of the argument made by the U.S. Treasury and other proponents of the legislation, and boils down to three points: Passage of the IMF quota reform will increase Ukraine’s access to emergency funding. I have argued in the past that the IMF should adopt as two-stage approach, rather than rushing to an ambitious IMF program that could destabilize Ukraine further. The first stage in this case is emergency, low- or non-conditional financing through the Fund’s Rapid Financing Instrument (RFI). With Ukraine’s current quota, that would be limited to around $1 billion. Under the new quota, it would rise to $1.6 billion. Is that material on its own? No. Is it potentially catalytic for a package of rapid-disbursing official aid that could total $5 to 6 billion? I believe so. The expansion of the quota would increase the amount of financing Ukraine could get under the Fund’s normal lending rules. With its new quota, Ukraine could borrow $18 billion over three years under normal limits.  I suspect that, in the end, the amounts needed will be larger than this and thus the Fund’s exceptional access and systemic exemption clauses will need to be invoked to allow a large financing package to proceed. But there would certainly be a challenge to such an approach, particularly by emerging markets that believe that a double standard exists in lending to Europe. Rising economic powers feel that the IMF does not adequately reflect their voice and their contribution to the institution. Passing the reform now would strengthen support for an ambitious Fund role, which has benefits for Ukraine as well as for future crisis cases. Together, I see this as compelling evidence that approval of the IMF package would, in the words of Secretary Lew, “support the IMF’s capacity to lend additional resources to Ukraine, while also helping to preserve continued U.S. leadership within this important institution.” In the end, Congress will have to decide quickly, as we cannot allow this debate to derail the broader effort to support Ukraine at this time. But given the considerations above, this is well worth the effort.  

Today we are please to have the following guest post written by Heidi Crebo-Rediker, a CFR Senior Fellow. Prior to joining CFR, Heidi served as the State Department’s first chief economist.  The urgent situation we now face to counter Russian aggression in Ukraine is a moment of truth for the United States. This where economic statecraft meets the cold hard power grab borne of an era we thought had passed. The world is looking for the United States to lead, to respond, and to take action. Russia clearly made the bet that the United States would not step up to this task. There are many tools in the economic toolbox that the United States and partners can employ to make this exercise in power a more painful one for Russia and a less painful one for Ukraine. All of these are on the table. Some are bilateral, other multilateral.  The United States, both Congress and the administration, has been remarkably impressive in its swift determination to come together and lead in this crisis, and to lead with economic tools. But there is one big gap in our leadership at an institution sitting at the center of Ukraine’s lifeline to an economic future: The IMF. A support package for Ukraine under consideration in the Senate includes funds for loan guarantees, support for stolen asset recovery, technical assistance, support for enhanced security cooperation assistance in the region, and allowance for additional sanctions. It also includes language necessary to pass IMF quota reforms agreed in 2010 that guarantee the Fund has the resources and governance structure necessary to support Ukraine and other economic crises that can threaten United States national security. The strategic case to support IMF reform has not been adequately articulated by the foreign policy and national security community. But it is of critical importance to both those communities. Passing IMF quota reform is more than re-configuring shares and chairs or the transferring of funds from one account to another.  Supporting this multilateral institution, an institution of our making for the purpose of being able to step up in situations just like this, is, in fact, strategic.  It would demonstrate that the U.S. Congress understands this responsibility to lead at a time when many of our friends and allies are questioning our leadership in the world. World leaders do not understand why the U.S. Congress does not “get it”--that international economic power matters--and the institutions that sit at the center of international economic policy need to be robust, representative and legitimate. The proposed reforms are ones that the United States pushed for and negotiated, specifically to address these three perceived inadequacies to ensure we have a strong IMF in the 21st century. Excuses, such as the IMF has “no constituency” in Congress or can be traded for another political priority, ring hollow abroad and feed fears that the United States does not understand its role in the world. Leadership comes, and is expected, in many forms. The IMF is our core multilateral institution to support member countries in times of economic stress. Ukraine is now the poster child for this need. The United States remains the largest shareholder and retains the right of veto on the most important decisions, but this does not equal leadership. It’s time to lean in and get this done.

You may have missed it amidst all the headlines from Ukraine, Russia and Brussels, but the White House announcement on aid to Ukraine yesterday had an important commitment: "We are working with Congress to approve the 2010 IMF quota legislation, which would support the IMF’s capacity to lend additional resources to Ukraine, while also helping to preserve continued U.S. leadership within this important institution." I have been a strong supporter of IMF reform and was disappointed that the Congress did not approve the 2010 agreement when the budget was passed in February.   The Administration now will try again, and its more than simply trying to take advantage of an opening provided by the crisis in Ukraine.  It is exactly at times like these that a strong and reformed IMF becomes an essential component of the international community’s response to crisis.  Passage of this legislation would send an important signal of U.S. commitment and leadership at a time when the Fund is at the front lines of the western support effort. Like the U.S. offer yesterday for $1 billion in loan guarantees, this commitment will have a multiplier effect on efforts to build a global support package for Ukraine.  It is one of the single best things Congress can do to demonstrate its leadership.