Brazil, the IMF’s A-List, and Currency Swaps

October 31, 2008

Following up on my earlier post in response to this Guardian story that offered an un-attributed claim that Brazil was appealing to the IMF for loans, it now looks like the Guardian wasn’t so much wrong as just a little inaccurate fuzzy on the details. Whereas the original Guardian story had spun the situation as though the wealthy nations of the Global South had come to D.C. with hat in hand, it looks like a totally different situation is in fact unfolding. The new liquidity fund is meant to offer stable “A-list” economies of the South the chance to strengthen their currency reserves in the event that foreign investment flows continue to run dry. According to the WSJ:

The IMF’s new program, called the Short Term Liquidity Facility, would be used largely to pad a country’s reserves, which could help the recipient defend its currency. But the funds could also be used to help recapitalize banks or cover import bills.

The IMF plan is its clearest recognition that its insistence on tough conditions is driving away potential borrowers that might need its help. But the new plan also puts the IMF in the position of deciding who can have money with few strings attached, and who can’t.

The attempt to draw a bright clear line between “responsible” and “irresponsible” borrowers is certainly new. It will be interesting to see where it leads.

Back to Brazil, though.

Reuters (via the Economic Times of India) actually found someone in Brasilia to do some reporting and added the following:

Brazil welcomes a new liquidity fund proposed by the International Monetary Fund to help emerging markets but does not see a need to draw on the funds for now, a source close to President Luiz Inacio Lula da Silva said on Wednesday.

“I don’t know if we will draw (on the fund) in the future. But we don’t need the money now,” the source said on condition of anonymity. The IMF board is considering a proposal for the Fund on Wednesday and an announcement is expected later in the day.

The Folha de São Paulo added even more critical details in its coverage, also noting that the IMF actions came in conjunction with an announcement that the US Federal Reserve will begin offering Brazil currency swaps at no cost in an effort to help the Lula government pump liquidity into the national economy:

The Central Bank [of Brazil] noted that, “these central banks of emerging economies with responsible fiscal policies and systemic importance,” will now be included in the global network of currency swaps.

The central banks of Australia, Canada, the Euro Zone, Denmark, the U.K., Norway, New Zealand, Sweden, Switzerland, and the U.S. Federal Reserve are currently part of that network. (my translation).

The Folha’s account was reiterated by Bloomberg as well, although the New York-based financial news agency did see fit to print at least one offensive, infantilizing quote that portrayed the poor countries of the world as naughty elementary school students:

“The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,” said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York.

If the central bankers of the world just needed to do their homework in order to build stable economic systems, I’d like to think that Alan Greenspan wouldn’t have had such a hard time.

Anyhow, if I understand this correctly, the actions taken by the IMF and the Fed signal an effort to treat these four middle income countries with an unprecedented level of parity in response to a crisis that has far exceeded anyone’s expectations. The implications for the post-election day Global Financial Summit are intriguing: will the members of the G22 now have a more substantive place at the bargaining table with an embattled Europe and U.S.? If so, will the Southern super-powers use their authority to defend the interests of their less well-off neighbors or will they merely seek a bigger slice of the pie?

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