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Doubt greets IMF bailout offers

The fund seeks to soften effects of the financial collapse, but many Asian leaders – citing bad advice from the '97 crisis – are wary of conditions attached to assistance.

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The legacy of that period has been more conservative borrowing by most Asian countries and a dramatic buildup in foreign reserves as a backstop against a repeat. Some policymakers in Asia have sought to pool these resources to ward off any credit crunch in the region.

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For its part, the IMF has quietly softened its approach by offering loans with fewer strings. Borrowers have long chafed over the laundry list of demands put forward under IMF programs, including cuts in social spending and tight monetary policies. While such conventional programs are being rolled out in Hungary and elsewhere, countries can now also apply for a short-term credit line that has far fewer rules, known as conditionality.

This might help sell the program to countries in Asia facing liquidity problems, says Charles Adams, a professor at the National University of Singapore and former IMF assistant director for Asia. "There's an implicit recognition that conditionality during the Asian crisis was too tough. So the IMF is trying to make itself more attractive."

So far, that's not working. For Indonesia, an IMF rescue could be deeply unpopular ahead of next year's national elections. As in Thailand and South Korea, nationalist leaders made political capital out of repaying IMF loans ahead of schedule and declaring that sovereignty had been restored.

Indonesia is in much better financial shape than it was a decade ago, but that hasn't stopped its currency, the rupiah, from skidding to a 10-year low. The central bank's foreign reserves dropped last month to $51 billion, down from $57 billion a month earlier. A weak currency hurts imports of basic goods, though it raises returns from exports of Indonesia's natural resources.

A history of botched currency devaluations makes Indonesians nervous about keeping money in rupiah, says Roland Haas, director of HB Capital, an investment fund in Jakarta. "When they see the rupiah tank, the natural inclination is to go long on dollars … but I don't see any need for a drastic [international] rescue at the moment," he says.

South Korea has run short of dollars, despite currency swaps with the US Federal Reserve and similar arrangements with Japan and China. The weakness of the won is due to offshore borrowing by local banks and has been exacerbated by inept leadership, says Tony Mitchell, managing director of the Korea Associates Business Consultancy in Seoul.

Before the crisis, South Korea had the world's fifth-largest foreign reserves. The fact that the war chest – and a highly industrialized economy – didn't prevent a run on its currency shows the limitations of such a strategy, which is inefficient and leads to huge imbalances between creditor and debtor nations, says Mr. Setser.

"If a broader set of countries could rely on trusted counterparties or a multinational agency like the IMF in a crisis, we wouldn't have a world where countries are holding 20 or 30 or 40 percent of their GDP in reserves," he says.