Dr. Susmit Kumar


 If a country goes to the IMF in case of a FOREX crisis, the IMF, mainly manned by the US Treasury Department, forces the country to pay the loaners' full amount. After watching IMF at work during the 1997 East Asia Economic Crisis, Joseph E. Stiglitz, the 2001 winner of the Nobel Prize in economics and chief economist at the World Bank from 1996 to 1999, wrote:


 I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled.[i]


 The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the  G-7 lenders got repaid.”[ii]


 It was perhaps he who described the crisis best: [iii]


 The IMF first told countries in Asia to open up their markets to hot short-term capital [It is worth noting that European countries avoided full convertibility until the 1970s.]. The countries did it and money flooded in, but just as suddenly flowed out. The IMF then said interest rates should be raised and there should be a fiscal contraction, and a deep recession was induced. As asset prices plummeted, the IMF urged affected countries to sell their assets even at bargain basement prices. It said the companies needed solid foreign management (conveniently ignoring that these companies had a most enviable record of growth over the preceding decades, hard to reconcile with bad management), and that this would happen only if the companies were sold to foreigners—not just managed by them. The sales were handled by the same foreign financial institutions that had pulled out their capital, precipitating the crisis. These banks then got large commissions from their work selling the troubled companies or splitting them up, just as they had got large commissions when they had originally guided the money into the countries in the first place. As the events unfolded, cynicism grew even greater: some of these American and other financial companies didn’t do much restructuring; they just held the assets until the economy recovered, making profits from buying at fire sale prices and selling at more normal prices.


 In his book Globalization and Its Discontents, Stiglitz, who was also a member of the Council of Economic Advisers under President Clinton, described meetings where President Clinton was frustrated because an increase of one-quarter to one-half percentage point in the interest rate by Federal Reserve Bank Chairman Alan Greenspan might destroy “his” nascent economic recovery.[iv] A comparison here with the actions of the IMF during the East Asian debacle is instructive: There, the IMF forced interest rates to raise by 25 percentage points—fifty times the interest rate Clinton complained about—for economies going into recession. The IMF argument for this enormous increase was that higher rates would make a country more attractive for investors. In reality, it made the situation even worse. Generally, a crisis starts due to Western creditors’ refusal to roll over short-term loans out of concern about firms’ potential inability to repay their loans on account of high indebtedness. A large increase in interest rates, however, makes matters worse for these firms. An increase in interest rates increases the number of ailing firms, causing an increase in nonperforming loans. Therefore, an increase of 25 points in interest rate is enormous and will thus have more catastrophic consequences.

 Explaining the effects of IMF’s bitter pills on East Asian countries at the onset of the 1997 East Asian Economic Crisis, Stiglitz wrote in his book Globalization and Its Discontents:[v]


 Because many firms were highly leveraged, many were forced into bankruptcy. In Indonesia, an estimated 75 percent of all businesses were put into distress, while in Thailand close to 50 percent of bank loans became nonperforming. Unfortunately, it is far easier to destroy a firm than to create a new one. Lowering interest would not un-bankrupt a firm that had been forced into bankruptcy; its net worth would still have been wiped out.


 The IMF bitter pills expose unfair lending practices by Western institutions. If a creditor loans to a foreign firm at 7 percent, and the firm thinks that it can make 15 percent yearly from this money, but the firm goes bankrupt, it should be a problem for the creditor and not the whole nation or the IMF.[vi] It needs to be considered as a bad loan. Before providing the loan, the creditor needs to check the lender’s creditworthiness. This is standard practice, and the possibility of bankruptcy is always considered a part of any loan. Contrary to standard practice, however, wherever the IMF intervenes and issues loans there after the crash so that Western creditors could recover their money. In the case of Thailand, people invested a lot of money in real estate, but since there were not enough buyers, the real estate market crashed. It was due to Thailand’s real estate sector that most East Asian economies eventually suffered due to the 1997 economic crisis, but currency speculators made a lot of money.

 When the Greek debt crisis broke in 2010, Athens turned to the EU for help. Assistance to Greece to this day has been contingent on Athens making domestically unpopular reforms. Nearly seven years, 13 austerity packages, and three bailouts (worth a running total of $366 billion) later, the Greek economy is still struggling. In early 2017, the debt burden now registered at about 177 percent of GDP. Non-performing loans total $119 billion, accounting for 45 percent of the country’s loans. Unemployment was still around 23 percent, and about three-fourths of unemployed people were jobless for at least a year. If all goes to plan, these measures will reduce Greece’s debt burden by one-fifth by 2060. While this may be a practical timetable given the size of the debt, it is not the most realistic solution. A lot can happen in 43 years. The proposal also does not give Greece the debt relief it seeks for the immediate term.[vii]

 In the IMF, major decisions, including the election of its managing director, require an 85 percent super-majority. The top three countries, having the highest votes, are the United States (16.75 percent), Japan (6.24 percent), and Germany (5.81 percent). Hence in IMF, nothing can happen without the wish of the US.

 It is worth noting that Soviet Union also attended the 1944 Bretton Woods conference where the treaty was ratified, but later declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street.[viii]

 Explaining the stranglehold of US over the IMF, Stiglitz wrote in his book Globalization and Its Discontents:[ix]


 In 1997, Japan offered $100 billion to help create an Asian Monetary Fund [at the onset of the 1997 East Asian economic crisis], in order to finance the required stimulative actions. But [US] Treasury did everything it could to squelch the idea. The IMF joined in. The reason for the IMF’s position was clear: While the IMF was a strong advocate of competition in markets, it did not want competition in its own domain, and the Asian Monetary Fund would provide that. The U.S. Treasury’s motivations were similar. As the only shareholder of the IMF with veto power, the United States had considerable say in IMF policies. It was widely known that Japan disagreed strongly with the IMF’s actions – I had repeated meetings with senior Japanese officials in which they expressed misgivings about IMF policies that were almost identical to my own. With Japan, and possibly China, as the likely contributors to the Asian Monetary Fund, their voices would predominate, providing a real challenge to the American “leadership” – and control.


 Eventually … [US] Treasury and the IMF could not ignore the [economic] depression [in the affected countries]. Japan once again made a generous offer to help under the Miyazawa Initiative, named after Japan’s finance minister. This time the offer was scaled down to $30 billion, and was accepted. But even then the United States argued that the money should be spent not to stimulate the economy through fiscal expansion, but for corporate and financial restricting – effectively, to help bail out American and other foreign banks and other creditors. The squashing of the Asian Monetary Fund is still resented in Asia and many officials have spoken to me angrily about the incident.

 [i]  “The Insider: What I Learned at the World Economic Crisis,” Joseph Stiglitz, New Republic, April 17, 2000.

 [ii]  Globalization and Its Discontents, Joseph E. Stiglitz, W.W. Norton, New York, 2003, p. 208.

 [iii]  Ibid. pp 129–30.

 [iv]  Ibid. p. 109.

 [v]  Ibid, p. 112.

 [vi]  Ibid, p. 200.

 [vii]  “Greece's Debt Problem Has Reached A Dangerous Point,” John Mauldin, Forbes.com, December 21, 2016, https://www.forbes.com/sites/johnmauldin/2016/12/21/greeces-debt-problem-has-reached-a-dangerous-point/#479a9b403583

 [viii]  "The World Bank Since Bretton Woods: The Origins, Policies, Operations and Impact of the International Bank for Reconstruction," Edward S. Mason and Robert E. Asher, Brookings Institution, Washington DC, 1973, 29.

[ix]  Joseph E. Stiglitz, op cit.

Additional information