As the global credit crunch bites hard, the list of countries seeking emergency aid from the International Monetary Fund grows ever longer: Hungary, Ukraine, Iceland. This scramble for funds has raised questions over the size of the IMF's war chest for further bailouts as more developing countries run short of hard currency.
The IMF says it has $200 billion in reserves and can tap an additional $50 billion credit line. At last weekend's G-20 summit in Washington, billed as an effort to recast global financial institutions for a new era, calls for a topping-off largely fell on deaf ears, with only Japan pledging an additional $100 billion.
IMF officials have warned that the latest loan package for Iceland, finalized Wednesday, won't be the last in what it calls a deep global crisis.
More money will likely be found, says Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington. "In the end, they will get the money. The [global financial] system will not let the fund run out of money," he says.
[An IMF spokesperson in Tokyo declined to comment on funding commitments.]
A thornier question is who puts in new money and what that means for an institution closely associated with Western powers. Just as the G-20 gathering represented a shift in the global financial order, a more inclusive IMF would have to make room for rising economies like China and Brazil. Its current board is dominated by the US, Japan, and European creditors.
British Prime Minister Gordon Brown said last week that countries sitting on surpluses, including oil-rich Gulf nations, should contribute more to the IMF. But Saudi Arabia publicly rejected the argument. Chinese President Hu Jintao also demurred, saying China's main contribution to financial stability is to prime its economy as an engine of global growth.
Behind the scenes is a tussle over how the IMF, World Bank, and other institutions are managed. "Realistically, in order to go much further [in IMF reforms], those countries who would contribute more would want a bigger say in running the institution," says Brad Setser, a fellow at the Council on Foreign Relations.
With the exception of troubled Pakistan, until now there have been no takers in Asia for an IMF bailout, despite warning signals in financial markets. In recent days, leaders in Indonesia and South Korea, which are struggling to prop up their currencies and restore confidence, have both explicitly ruled out going to the IMF for help – the idea carries bitter memories of the Asian financial crisis in 1997-98 that many policymakers believe was worsened by bad economic advice from the IMF.
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.
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.