IMF swoops in with cash, conditionalities

Iceland and Hungary are the first recipients of IMF loans as a result of the current global financial crisis.

In a sign of what’s to come, the Fund is already demonstrating its continued willingness to impose policy conditionalities on borrower states.

The Guardian has the story in Hungary:

This week the International Monetary Fund stepped in to stop any more investors from pulling their funds out of the country altogether. Hungary is now set to become the first EU state to receive an IMF lifebelt – of around €12.5bn.

The bail-out announcement received a mixed response in Budapest yesterday. “We have a credit noose around our necks,” declared the rightwing daily Magyar Hirlap, while another paper showed bundles of forint notes being sucked up by a cyclone.

“This is going to be tough,” said the tabloid Blikk, pointing out that a condition of the loan would be a 300bn forint cut in public spending, which will likely lead to high inflation and attacks on social benefits.

And the Financial Times covers Iceland:

The application will be presented to the IMF’s board on Thursday and the central bank said a condition attached to the loan was for a rate rise to 18 per cent.

The move reversed a 3.5 per cent rate cut announced just two weeks ago by David Oddsson, central bank governor, underlining the influence the IMF now has over policymaking in Iceland.

Brian Coulton, managing director at Fitch Ratings, the credit rating agency, said Iceland’s central bank had “no choice but to work very closely with the fund”.

While the policy conditionalities attached to the loans appear less extensive than the intrusive demands the IMF and World Bank used to place on its borrowers, the persistent willingness of the Fund to dictate borrower fiscal policy suggest that the D.C.-based institution has failed to learn from experience. IMF-sponsored structural adjustment policies implemented throughout the 1980’s and 90’s precipitated a string of fiscal crises in the economies of the Global South.

While I’ll have to dig around in the academic journals to assess whether there’s any evidence that IMF-loans caused later crises among borrower countries in the 80’s and 90’s, the historical record in places like Argentina, Mexico, and Brazil is pretty clear: in the process of imposing conditionalities had profound flaws that facilitated the collapse of otherwise strong currencies.

The obvious difference this time around is that the borrowers are in Europe – it will be interesting to see how this affects outcomes.