Those IMF Funds

In talking about the East Asia financial crisis, economists - and even Washington politicians - refer to the "moral hazard" involved.

They aren't speaking of something that's "immoral" in the common sense of that word. But fairness is involved. And it is important enough that President Clinton felt compelled to deal with it in his State of the Union address Tuesday.

Those who study economic relationships find a "moral hazard" if a nation, business, or financial entity makes unwise or risky decisions in hope of rapid gains, but escapes financial punishment should the venture fail. The hazard arises because, without penalty, the temptation is to repeat the action in hope of better fortune.

US banks and other industrial countries made short-term loans to, let's say, South Korean conglomerates, or chaebol. Since the financial books of these firms don't usually meet Western standards, and since Korea has an "emerging" market, the loans are risky by nature. They pay a high interest rate.

If the loans go sour, the banks would normally take a financial "haircut" - a loss. But if the government takes over loans and guarantees repayment, the foreign banks escape their lesson. Only the reckless borrowers suffer. The reckless lenders come out ahead.

To some on both the right and left of the US political spectrum, any such rescue is unwise.

The International Monetary Fund and governments, these critics add, should keep out of the mess. Debtors and creditors should be left to negotiate a settlement, sharing losses.

They figure the IMF is the bad boy. It provides the financial means to debtor nations to rescue not only their own banks and firms in trouble, but also the reckless lenders.

They argue that Congress shouldn't provide the IMF any new funds. But Mr. Clinton repeated his request for that money Tuesday.

Congress should heed his call despite the "hazard." This crisis is too serious to expose it to a free-market experiment. If it were to spread, it would cost American workers jobs and businesses sales and profits.

"Preparing for a far-off storm that may reach our shores is far wiser than ignoring the thunder until the clouds are overhead," the president said.

Treasury Secretary Robert Rubin noted earlier: "We cannot afford to stand back and gamble that the crisis will resolve itself.... We hurt ourselves."

Three other points.

First, the IMF has never cost US taxpayers a dime. When the IMF draws on a US commitment, the US receives a liquid, interest-bearing offsetting claim on the IMF. There are no budget outlays.

Second, the danger of a moral hazard has been exaggerated. No nation finds a financial crisis involving IMF help pleasant. IMF loans bring conditions that are no fun for politicians, let alone their people.

Nor do financial institutions usually get away scot-free. American banks took losses on their loans to developing countries when "Brady" bonds were issued late in the 1980s.

In this current crisis, foreign investors in the Asian nations have lost serious money. The way negotiations are going with debtors in Korea and Indonesia, foreign banks, too, are likely to suffer damage. Some US investment banks and commercial banks have already announced big hits on their Asian operations.

Third, it is advantageous to the US and other industrial countries that prosperity return quickly to East Asian nations. In an interconnected world, prosperity must be shared.

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