Short of Cash

A battle over aid to the IMF

Just to judge from the opposing lineups, it looked like a fierce but unequal contest. On one side stood President Reagan, Federal Reserve Chairman Paul Volcker and many of the mightiest bankers in the U.S. and abroad. On the other side was an unusual left-right coalition that included religious and environmental groups as well as Consumer Advocate Ralph Nader and conservative Congressmen like Jack Kemp. At issue was a plan, already passed by the Senate, for the U.S. to pump an additional $8.1 billion into the International Monetary Fund to help the organization bail out indebted developing countries.

Reagan and company supported the proposal. The coalition strongly opposed it, and by week's end had shown so much clout that the House of Representatives was forced first to delay a vote on the increase and then to tie strings to it by adopting an amendment put forward by Banking Committee Chairman Fernand St Germain. The hastily drafted measure would tighten control over the release of funds to the IMF and discourage banks from making excessive overseas loans. The provisions should improve prospects for the increase when the House takes final action, perhaps as early as this week.

The changes reflected the strength of opponents who attacked the increase as a bailout for major Western banks that have lent some $300 billion to developing countries. Declared Howard Ruff, founder of Free the Eagle, a 60,000-member group that spent more than $600,000 to fight the measure: "Every penny of the IMF money will flow right back to the banks, and they shouldn't be rewarded for getting us into this mess." Nader took a similar tack. Said he of the IMF'S activities: "The net effect is to allow large banks to pass off loan risks to public institutions while continuing to reap high loan profits."

Those favoring the increase insist that the IMF needs the funds to continue propping up shaky nations. The agency is committed to lending more than $10 billion to Brazil, Mexico and other countries this year to keep them from defaulting on their enormous foreign debts. Warned Volcker: "The IMF is at the very center of efforts involving hundreds of banks and dozens of countries to achieve the adjustment necessary to control the international debt situation." Reagan, who has called the boost "important legislation for international economic stability," has been huddling with Congressmen to push the measure.

Supporters of the increase are worried that a defeat would unsettle the world's banking system. "It would send a very discouraging signal to world financial markets and the countries most in need of new credits," says one U.S. official.

The IMF needs fresh cash because the wave of near defaults has left it almost broke. "The agency's financial position is very precarious," said Rimmer de Vries, chief international economist for Morgan Guaranty Trust. "It is already lending more than its resources permit."

Last February IMF members agreed to replenish the agency's funds with $43 billion. The IMF already has $26.2 billion in outstanding loans. The U.S. was asked to put up about 19% of the new money, or $8.1 billion. If the U.S. fails to provide its share, other nations, such as Japan, West Germany and France, may back out of the agreement as well. Without new funds, the IMF would run out of cash for loans by the end of the year.

The IMF is vital to world financial stability mainly because it serves as a catalyst for private lending. The agency makes loans only to countries that agree to launch programs to restore their economic health. Once such measures are adopted, commercial banks are usually willing to lend more to the troubled countries. Earlier this year, for example, Mexico was able to get $5 billion in new credit from private banks only after it agreed to cut public spending and received a $3.8 billion commitment from the IMF.

The major private lender to developing countries is Citicorp, which has lent $4.4 billion to Brazil alone. In all, the nine biggest American banks have provided some $70 billion to the most heavily indebted countries, including more than $42 billion to those in Latin America.

The bankers fear that without continued IMF support some foreign borrowers would be forced to default. Such moves would depress bank profits by causing the lenders to take losses on the loans. "The big U.S. banks are maintaining the fiction that all their loans to weakened debtor countries are good," says George Soros, president of Soros Fund Management, a New York-based firm that manages $2 billion of financial assets. "But if the IMF quota does not go through, the banks would have to start writing off those loans more aggressively." That could set off a chain reaction that might put the international financial system in a precarious position. This file is automatically generated by a robot program, so viewer discretion is required.