Next week, Treasury Secretary Jack Lew will make his case before the House Financial Service Committee for linking IMF reform to U.S. bilateral aid for Ukraine. If the past is any guide, he will do so by putting forward a set of disingenuous arguments in favor of his case. This has to be regretted. For both Congress and the American people deserve that an issue as important as IMF reform be debated on an accurate set of facts rather than on half-truths about the issue at hand that might suit the administration’s purposes.
The principal argument that Secretary Lew must be expected to make is that IMF quota reform is essential for large-scale IMF Ukrainian financial support. This argument glosses over the fact that under the IMF’s lending policy under “exceptional circumstances”, which has been resorted to on many occasions since the 1994 Mexican tequila crisis, the amount that the IMF can lend a country bears little relation to the size of that country’s IMF quota. Whereas prior to 1994 the IMF had limited itself to lending no more than 300 percent of a country’s IMF quota, by the time of the European sovereign debt crisis in 2010, the IMF loaned countries like Greece, Ireland, and Portugal as individual circumstances dictated between as much as 1,500 percent and 2,000 percent of their respective IMF quotas.
Another less than candid argument that Secretary Lew might be expected to make is that the U.S. would give up little by agreeing to a shift of the U.S. $63 billion it has already committed under the New Arrangement to Borrow to the IMF’s general resource account. He will point out that according to the non-partisan Congressional Budget Office such a transfer would cost the US budget less than U.S. $400 million. However, what Mr. Lew will not tell Congress is that were it to agree to such a transfer, the U.S. would be giving up effective control over how an important part of the IMF’s resources might be used. Since while the US has an effective veto over IMF loan authorizations under the New Arrangement to Borrow it does not have such a veto over the IMF’s use of its general resources.
The U.S. Treasury never tires of assuring Congress that large-scale IMF lending poses no risk to the US taxpayer. It bases its argument on the fact that the IMF enjoys preferred creditor status and that to date no major country has defaulted on its IMF loans. However, the Treasury conveniently glosses over the fact that IMF loan repayment experience with past IMF lending on a small scale might not be a good guide to what might happen on IMF loans of an unprecedentedly large scale. To understand that there now might be a real risk to the US taxpayer from IMF lending, one only need reflect on the IMF’s current Greek lending experience. Greece’s public debt is now mainly officially owned and it amounts to over 175 percent of GDP. It is far from clear that the European Central Bank will go along with the idea that the IMF enjoys senior status over the ECB in terms of Greece’s loan repayments.
Perhaps the most critical question that Mr. Lew will choose to gloss over is whether in fact we really need as big an IMF on a permanent basis as the IMF reform would entail. In particular, one should not expect him to note that since the December 2010 G-20 meeting, which agreed upon the need for IMF reforms, fundamental institutional changes have occurred in Europe that would argue in favor of a very much smaller sized IMF.
Those changes, which now put Europe in the position to deal with its own crisis without massive IMF support, included the setting up of a EUR500 billion permanent European Stability Mechanism. They also included the introduction by the European Central Bank (ECB) of an Outright Monetary Transaction (OMT) program. Under the OMT, the ECB is authorized to buy as much of a member country’s government bonds with a maturity of up to 3 years as might be needed subject to that country having negotiated an ESM economic adjustment program.
All of this is not to argue that in the end Congress should not accede to IMF reform. Rather it is to argue that the issue of IMF reform should be debated on an accurate set of facts. It is also to argue that the question of US bilateral support to Ukraine should not be held hostage to passage of IMF reform that might not stand on its own merits.
Lachman is a resident fellow at the American Enterprise Institute. He is a former deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.