Moral Hazard for Investors

Anyone with a retirement kitty holding stocks or bonds in developing nations might do well to keep an eye on the global watchdog for high finance.

The International Monetary Fund, the rescue squad for countries sinking in red ink, appears to be letting private investors sink a little with them.

It's called accepting the "moral hazard" for risky foreign investments.

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Up to now, IMF bailouts from Brazil to South Korea have included mega-billion-dollar loans that help governments pay back debt, especially official bonds.

But last month the tiny Latin American nation of Ecuador failed to pay the interest on $6 billion of so-called Brady bonds. It was a first.

Then last week the IMF appeared to wink at Ecuador's move. Bond traders gagged, waiting to see if the IMF will confirm this action as a new policy during its annual meeting next week in Washington.

Brady bonds, named after former US Treasury Secretary Nicholas Brady, were designed in the 1980s as a clever tool to help poor nations by repackaging defaulted bank debt as bonds backed by US Treasury bonds.

Now Brady bonds and Ecuador are being used as a guinea pig. The IMF has taken heat in recent years for rescuing investors, which only encourages them to take more high risks while allowing governments to avoid reforms.

Congress, among others, has woken up to the IMF's practice of saving international banks and private investors by using taxpayers' dollars. The example of Russia's misuse of IMF money has the agency scrambling to reform itself.

Keeping nations afloat and international financial markets from collapsing are worthy IMF goals. But lessons from recent bailouts point to a new way of letting all risk-takers share the burden of their investments.

(c) Copyright 1999. The Christian Science Publishing Society

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