The Lender of Last Resort

IMF rescues strapped nations--but demands a stiff price

After months of haggling and pleading, H. Johannes Witteveen, managing director of the International Monetary Fund, managed to herd representatives of 14 nations into the Kleber Avenue conference center in Paris last week for some pressing business. Although the nations of the world have been borrowing madly from one another and from private banks, many countries, especially underdeveloped nations of the Third World, are still unable to pay the soaring costs of imported oil. To bail out these nearly bankrupt states, Witteveen wants seven Western nations, led by the U.S., and seven OPEC countries, headed by Saudi Arabia, to raise an emergency fund of about $10 billion to be parceled out in loans by the IMF. At week's end Witteveen pronounced the meeting "very successful" and announced that the fund would begin operating in September.

Creation of the "Witteveen facility," as the emergency pool has already been dubbed, will greatly expand the IMF's rapidly growing importance as lender of last resort to countries about to go on the rocks --and demander of unpopular economic steps that nations must take to qualify for their loans. That is a role that was never planned for the Fund when it was created at the Bretton Woods, N.H., international monetary conference in 1944 and would have seemed unlikely even four years ago.

Yet bankers and politicians round the world almost unanimously applauded Witteveen's initiative. Irving S. Friedman, senior adviser for international operations at Citibank, has gone so far as to advocate an increase in total IMF resources to a staggering $100 billion. Says he: "I am not looking at what might be enough in 1977.1 am looking at what is going to be enough in 1987."

The bankers have good reason to applaud the Witteveen facility: it will at least relieve both them and their international borrowers of a burden that is swiftly becoming a threat. Lately, private banks have taken on much of the job of recycling the enormous surpluses piled up by oil-exporting nations. Total debts owed by governments to major commercial banks ballooned from $110 billion in 1969 to $550 billion last year. Now the banks are reaching the ceiling of their willingness to lend to troubled nations--and countries such as Brazil, Mexico, Peru and Zaire may be nearing the end of their ability to repay, unless they get new credits. Various experts believe that without emergency loans from the IMF, a number of less-developed countries would default on their loans, possibly bringing down some big banks or triggering an international economic collapse.

The IMF'S role as international lender is a creation of circumstances and Witteveen, in about that order. The Fund is a giant institution: 131 member countries, substantially all of the non-Communist world; 20 executive directors representing geographic blocs; a Washington headquarters outfitted with teak-paneled walls and leather-tufted elevators. Yet for almost three decades, it was content to monitor the system of fixed exchange rates of member countries. Among other things, it put up short-term cash that nations could use to buy or sell their own currencies, keeping the values within the narrow band specified by IMF rules, and gave its approval--usually grudgingly--for devaluations or upward revaluations. After the U.S. severed the link between the dollar and gold reserves in 1971, the fixed-exchange-rate system collapsed, and nations allowed their currencies to find their own exchange levels in a relatively free market. The IMF for a time became a big agency that had nothing much to do.

The explosion of oil prices in 1973-74, combined with worldwide recession, changed all that. Witteveen, who took over as managing director in 1973, quickly put together an IMF fund of $8 billion to enable countries to pay for those costly oil imports.

Moreover, under Witteveen's direction, the IMF is selling 25 million oz. of its gold at public auction, with the profits earmarked for dispersal to underdeveloped states. (The gold was part of the entry subscription demanded of IMF members, who are assessed roughly on the basis of their gross national product and balance of payments accounts.)

Ever since 1973, Witteveen has been like a busy fireman, damping the flames of inflation here, assisting dying economies there, and acting at times as if he were the head of a supranational central bank. Earlier this year the IMF provided a $3.9 billion emergency loan to Britain, which was strapped at the time with an enormous balance of payments deficit.

Then it was on to Rome to negotiate a loan of $530 million to the Italian government, which was on the verge of being overthrown because of chaotic inflation and an inability to finance oil imports. "What would have happened without the Fund," says one international banker, "is too ghastly to contemplate."

But in return for those loans, the IMF prescribes the kind of medicine that most governments detest: reduction in public spending, targets for lower inflation rates, tightening of credit--in effect, a reduction in the standard of living. Witteveen, to be sure, denies that the IMF imposes its will on creditor countries; "consultation" is all that it asks, he claims. The distinction is largely semantic: the IMF may not tell a borrowing country how much to cut its budget or how much to raise taxes, but it can keep refusing a loan until officials come up with budget-balancing measures that satisfy Fund directors. Says one official of the West German Finance Ministry: "Where it would be impossible for us or the Americans to bring real pressure on Italy, the IMF can do a good bit more, as an international body, without rousing patriotic fervor against us."

The IMF brand of discipline, when imposed, has helped to touch off riots in Cairo and intra-government disagreements in Peru. When the dictatorial Peruvian regime refused to impose IMF restrictions last month, both the head of the Central Bank and the Finance Minister resigned in protest. No doubt the IMF and the private banks will reach an accommodation with Peru, possibly by stretching out debt repayments.

Because the debates among IMF members are necessarily secret, a strange mystique has settled around the Fund. The curious personality of Witteveen--part hard-nosed banker, part mystic (see box) --has only added to the organization's enigmatic reputation. The mystique is undeserved, since the delegates are as subject to emotion and nationalistic impulses as any businessman or politician.

At one meeting, an Irish delegate, although warned not to contribute to a special fund, was impelled by Hibernian hubris to kick in a few million pounds when he heard the Arabs pledging huge sums. On his return to Dublin, the head of the Central Bank said to him gloomily, "My God, man, do you realize what you've done? Now the government will have to put another penny tax on a pint of stout!"

Picayune as that consideration may be, the IMF'S stern discipline has a dark side: it could have a pernicious effect on world economic growth. When countries are required to reduce or eliminate their balance of payments deficits, there are fewer customers for the products of industrialized nations and fewer buyers of basic Third World commodities such as bauxite and copper. The end result could be a vicious cycle that would dampen investment and lower incomes.

As Sociologist Daniel Bell put it recently, "If economic growth, which has been the means of raising a large portion of the world into the middle class--and also a political solvent to meet the rising expectations of people and finance social welfare expenditures--cannot continue, then the tensions that are being generated will wrack every advanced industrial society and polarize the confrontation between the South ... and the advanced industrialized capitalist societies of the West." IMF directors would doubtless reply that that is a prophecy of apocalypse tomorrow--and they have their hands full warding off disaster now.

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