IMF Seeks Larger Credit Line,
Higher Reserves to Avert Crisis

By JACOB M. SCHLESINGER
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- Two years after Mexico's financial crisis jolted the world financial system, the International Monetary Fund is completing a new safety net designed to better contain such emergencies in the future.

As early as the end of January, the IMF says it plans to formally reach an agreement with two dozen countries that would allow the fund to borrow as much as $28 billion to lend the next time there's a run by private investors on a cash-strapped country. Broadening its reach beyond traditional sources of IMF funds in the U.S., Japan and Europe, the new credit line will allow the IMF to tap the huge reserves of rapidly developing Asian economies such as Malaysia and Thailand.

The IMF says it will also seek in 1997 a sharp increase in the money that member countries contribute, invoking the Mexican crisis as a justification for expanding the fund's reserves. The request will likely run into strong political opposition, especially in the U.S. At the same time, the IMF is stepping up surveillance, which officials admit has been lax, of possible trouble spots. And the fund is creating standards for reporting financial data by all countries, to make it easier for investors to monitor risk.

As a result, "the world is a safer place," Stanley Fischer, the fund's deputy managing director, said in a recent interview. "It is absolutely impossible to prevent crises. But these changes are an improvement."

To the IMF's many critics, such claims are overstated. They say the changes are cosmetic, and consider the IMF an anachronism incapable of dealing with the dramatic changes in the global economy.

Not 'Under Control'

"The IMF is an extremely mediocre institution," said Harvard University economist Jeffrey Sachs. "Its staff is very small and they don't have the technical training. There has been some improvement, but this is not an improvement that should give ready comfort to markets. Nobody should be fooled that this is under control."

The reforms are aimed at retooling an agency created in the wake of the Great Depression to help ensure global financial stability. The Mexican meltdown of December 1994 demonstrated how much developing countries have come to depend on private capital, and how badly the fund had kept up with that transformation. The IMF failed to detect Mexico's troubles as they developed, and had no clear procedures to respond once the problems surfaced. After Mexico revealed it was near default on its short-term borrowings, investors yanked billions of dollars out of the country, creating a cash crunch.

Until the Mexican crisis, the IMF made a point of nagging countries that ran large trade and government-budget deficits. But it failed to pay enough attention to how countries financed their trade deficits or to the risks of weak banking systems. Another reason the IMF failed to notice Mexico's frailties was that the fund reviewed closely only those nations that had IMF loans outstanding. Mexico had none.

The IMF now thoroughly monitors more countries, and it pays more attention to financial markets. Only in 1996 were financial news-wire screens installed in IMF officials' offices to flash market developments. "There's a great deal more attention to the possibility of crises emerging," Mr. Fischer said. Armed with that information, "we've decided to take a more active role" in informally badgering countries, Mr. Fischer added. "Countries are more likely to get letters from us than they used to."

The IMF is also becoming the world's unofficial financial-markets regulator, creating disclosure standards for countries seeking foreign capital. In hindsight, the lack of internationally accepted benchmarks for disclosing economic data helps explain how Mexico went so quickly from being the darling of Wall Street to confessing that its finances were so precarious that it might default.

Data on Internet

The fund recently defined what data countries should disclose -- such as inflation rates and government -- debt obligations -- and how frequently. Soon governments will begin posting those figures on the Internet. The IMF cannot require compliance, but officials hope that vigilant investors will force adherence.

Though seemingly mundane, better data dissemination could help integrate emerging markets into the world economy, advocates say. "In the history of U.S. capital finance, the spread of generally accepted accounting principles has had a greater impact than the bailout of Chrysler or Lockheed," said Deputy Treasury Secretary Lawrence H. Summers.

Greater scrutiny and disclosure have limits. The fund has expanded its mission without significantly boosting its annual $400 million budget or its staff of 2,600. Even in the best of worlds, Mr. Fischer said, "no amount of data is going to prevent us and capital markets from making mistakes."

So the IMF is trying to enhance its ability to cope, should another Mexican-style crisis emerge. That means raising more cash and developing procedures to dispense it more quickly. One lesson from Mexico was that financial crises can spread faster and farther than in the past. When the world's major creditors were government organizations such as the IMF or private banks, debtor countries could renegotiate loans over a number of years, working with a handful of experienced bankers and bureaucrats.

But Mexico relied heavily on an incalculable number of anonymous, short-term bondholders, who could withdraw their money instantly. More frightening, Mexico's travails threatened to drag down emerging markets around the world. An emergency loan package assembled by the U.S. and the IMF staved off default. But the effort had no precedent and ruffled feathers among some IMF members. And while the roughly $50 billion package proved sufficient, "everybody was shocked at the scale of the problem," said Mr. Fischer. It raised the specter that "in an extreme crisis, IMF financing could turn out to be inadequate."

Besides, the U.S. pressure that was instrumental in rescuing Mexico may be lacking in the next debt crisis. "Mexico was a special case," said Mr. Sachs. "It is the only developing country in the world that has a 2,000-mile border with the U.S. That means no other developing country in the world will get this kind of treatment."

'Spare Fuel Tank'

The IMF has since drafted formal procedures for directing such bailouts, and will soon have a new "spare fuel tank," as Mr. Summers calls the $28-billion credit line. The so-called New Arrangements to Borrow won't consist of a standing fund, but of lending commitments from participating countries who will have to give consent before money is used.

The trick to making the bailout fund successful will be to use it sparingly. Analysts say the very presence of the credit line could encourage recklessness among countries and investors, much as government deposit insurance allowed savings-and-loan associations in the U.S. to make risky investments. Mr. Fischer argued that the Mexican workout was sufficiently painful to the Mexicans that other countries are unlikely to follow suit. But he said that many investors may have escaped with more money than they should have. A guiding principle of future bailouts, he said, would be make sure creditors suffer some pain.

"You're not going to let a country go down the tubes in order to make a point about creditors misbehaving," he said. "But it's important for lenders to know that there's an impulse in the official sector not to bail them out."