Commercial Banks and the IMF: An Uneasy Alliance

The annual meeting of the International Monetary Fund (IMF) is the trade fair of the multinational banks. Here gather together the highest financial officials-ministers of finance, central bank, governors-of virtually all the nations in the capitalist world, to affirm their nations' nominal sovereignty over this international institution. And, unofficially, the David Rockefellers of the world make the scene, hosting elaborate dinners and cocktail parties, broaching hundred-million-dollar deals in reception lines and nailing them down in hotel rooms. For the "governors" of the IMF are also major borrowers from the multinational private banks, and once a year this event brings together the three parties in a strange triangular symbiosis.

For a number of unfortunate countries, mainly in the Third World, the, coming year will be the occasion of less happy contacts with the IMF and their creditor banks. A debt crisis, caused in part by the overenthusiastic acceptance of easy bank credit a few years previously, will drive the finance ministers and central bank governors to petition their creditors for relief from intolerably heavy repayment obligations. The bankers will, more often than not, insist that the borrowing country make an agreement with the IMF first. And the price of an agreement with the IMF is inevitably, a socially regressive austerity program that will mean hard-, ship, loss of jobs, and lower real incomes for the people least able to, afford the sacrifice.

The banks are thus partners of a sort with the taxpayer-funded institution. But it is an uneasy partnership, and each side wants something different from the relationship. The banks want to make sure their loans will be serviced regularly and repaid, particularly if they are reluctant to extend new finance and are looking to reduce their exposure in the Third World. The IM F, on the other hand, wants the banks to follow its often politically-motivated decisions on which governments do or do not deserve financial support.

An IMF agreement, from the banks' point of view, will help insure they get paid on time. The IMF normally demands that governments honor their foreign payment obligations, and to this end insists on liberalization of exchange and import controls, reduction of real wages, and deflationary economic policies. The banks might reconsider the economics of their belief in the Fund, however, for in practice IMF programs reduce the productive capacity of an economy and there is little evidence that the programs lead to permanent improvements in a country's debt situation. In many cases, they have led only to the necessity of repeated agreements to meet recurring crises.

The political reasoning makes better sense. The IMF is not a politically neutral think tank of financial technocrats, but an agent of the major creditor nations, of which the most important is still the U.S. The Fund is frequently used for political purposes-to support governments favored by the U.S. as well as to discipline those which display unacceptably independent behavior.

The bankers are assuming that home country governments-the controllers of the IMF-cannot afford to watch their major financial institutions or client nations fall into bankruptcy. The IMF "seal of approval" does not mean that the borrowing government is putting its financial house in order-no one who has watched its close association with the incredibly corrupt government of Zaire can take its economic function seriously-but it does signal that the Western nations are willing to support the government that has signed the agreement. The IMF loan itself, as well as the additional aid money that it unlocks, will make it possible to continue servicing the bank debts.

The banks would like even closer cooperation with the IMF as firmer security that their loans will be serviced. For several years leading international bankers have proposed, publicly and privately, that the IMF directly guarantee the safety of their loans. This could be done in several ways: through co-financing, which is a contractual arrangement linking two loan agreements specifying that each creditor will consider a default on the other as a default against itself; through a rediscount facility allowing banks to offload their riskiest loans to the IMF; or through IMF sale of its bonds to banks, making the Fund itself the risk-bearing intermediary in the chain of credit.

Thus far the Fund has shown no official approval for any relationship closer than the present "parallel financing" in which the banks make agreement with the IMF the condition for rescheduling their old loans or extending new ones. While the Fund is happy to see the banks lining up behind it and giving a stronger impetus to acceptance of its conditions, its complaint is that such discipline is still all too rare. Far too often the banks lend as they please, sometimes even lending in the middle of delicate negotiations for an IMF standby, thereby frustrating the Fund's attempt to obtain stern conditions. The banks' solidarity with the IMF is a relatively recent development and -is still on a very partial, case-by-case basis. In the early 1970s, when the banks had just discovered "sovereign risk" lending, they paid no attention to the IMF and their loans aided a number of countries in avoiding recourse to the Fund and its stringent austerity programs. It was only when repayments began to build up to a danger point that the banks saw a rationale for bringing in the f M F to restore order.

In a few cases the banks have even been willing to deal with countries which have, explicitly refused 1 M F supervision. The most famous example of this type is that of Peru, where in 1976 the concerned banks decided to band together to monitor an IMF-style austerity program after the Peruvian government had indicated its firm refusal to negotiate further with the IMF. To be sure, the experience was an unhappy one for the banks; they found themselves ill-equipped to monitor such a program and bearing the brunt of public hostility for the unpopular austerity plan they were attempting to enforce. Eventually both the banks and the Peruvian government were driven to take recourse in the IMF.

The cases where the banks have tried to coordinate their lending with the I M F are well known-Peru (after their abortive experiment), Turkey, and Zaire, are probably the most notorious -but far more common are the occasions on which the banks have relied only on their own assessment of risk. Brazil, for example, one of the most heavily indebted developing countries, has not had an IMF stand-by since 1966. The opposite case is also true: some countries which have the Fund's seal-of-approval are not able to attract bank loans, or do not obtain them in the desired quantities. The blunt fact is that market conditions are the overriding factor in deciding banks' willingness or reluctance to lend: when the markets are liquid banks need to make money by making loans and will pay attention to the Fund's advice only in marginal cases, and when money is tight they may not be willing to make new Third World loans even with the best recommendation from the Fund.

The banks have long insisted that the Fund could best assist them to make prudent loan decisions by making available to them (the banks) all the information which the Fund collects in the course of its consultations with its members. These reports are now treated as confidential and the member countries are vocal in insisting they must remain so. Fund officials freely admit, in any case, that they furnish information on a selective basis in an "informal, oral way" to contacts in the banking community. Bankers clearly object to the selectivity of the information furnished; it may well be suspected that the Fund uses these pieces of information to attempt to steer lending in a desired political direction, supporting and punishing governments according to the wishes of their political masters, the rich creditor countries of which the U.S. is still the chief.

Another form of assistance the banks would like to see is a large increase in IMF lending, as well as increases in World Bank and bilateral official aid. This becomes particularly desirable in recessionary periods, as 1980 has become. In times like these when the banks wish to reduce their exposure in Third World countries, massive official credit becomes important as a means of insuring that they will be: able to withdraw their money safely. If the IMF had larger amounts to lend, this would not only be a more attractive 'bait attached to its stabilization programs. It would provide both the incentive for repayment of bank loans, because the Fund absolutely refuses to sanction any unilateral debt repudiation or moratorium, and the money necessary to make repayments that might otherwise-be impossible for hard-pressed debtor governments to dig up.

The Fund is already borrowing on its own account from OPEC and Western countries in order to expand its Third World lending beyond that permitted by its member-country subscriptions. But the supplementary "Witteveen" facility which at $10 billion seemed enormous when negotiated, now appears to be sadly inadequate to fill the gap left by expanding deficits and contracting bank loans.

It is anticipated that even larger borrowing will be attempted in order to head off a new payments crisis later this year. If it succeeds, this would be the largest-ever bailout of private commercial banks by the taxpayers' money and guarantees of this inter-governmental organization.

Cheryl Payer, a New York-based political economist, is author of The Debt Trap: The International Monetary Fund and the Third World. (Monthly Review Press, 1974) She is currently a visiting professor at Northwestern University.

Jamaica Rejects IMF Stand-By On March 22, the Executive Council. of Jamaica's ruling People's National Party' (PNP) voted by a margin of 2 to 1 to discontinue negotiations with the International Monetary Fund (IMF) for a new stand-by agreement. Nearly three years of experience with IMF stand-bys have made the Fund the hottest political issue in Jamaica, and the decision-the most momentous in the island's history-was greeted in some quarters with hope and in others with apprehension. Jamaica is one of the few Third World countries that still has a functioning two-party democracy. And political considerations loomed large in the party's decision. Under Prime Minister Michael Manley, the PNP won a landslide, victory in 1976. Economic problems drove-the government to sign an agreement with the I M F in July, 1977. After failing one of the Fund's performance tests the following December, Jamaica signed an even harsher agreement in 1978. The Fund's stand-by program led to a drastic decline in real wages (estimated as high as 25 percent in one year alone) amongst the poorer classes that constitute the PNP's chief base of support. PNP organizers blame the decline in real wages for their parallel, decline in the popularity polls: recent polls seem to indicate the PNP will probably lose the next election (most likely to be held in September) to its right-wing opponent, the Jamaica Labor Party (JLP). It is widely believed in Jamaica that the nations which control the IMF would prefer to see the PNP lose the election to a party more-favorable to private capital, and that the Fund's performance tests might be rigged to insure failure and suspension of the stand-by just before the . elections. Jamaicans also recall that the commercial banks, which hold 35 percent of the nation's total debt, did not respond enthusiastically with new funds to the previous IMF agreements. They therefore question whether they will be able to raise the needed funds even with the IMF So unpopular is the Fund amongst the constituency of the PNP that the Prime Minister faced possible disintegration of the party organization if another agreement was concluded& before the elections. Several council! delegates privately expressed to me their unwillingness to continue organizing work under such conditions. The final vote consequently reflected the overwhelming sentiment that only by rejecting the IMF conditions could the party remain true to its populist traditions and stand any chance of winning at the polls. The commercial banks had lent enthusiastically to Jamaica in the early. 1970's but became wary of new lending in 1976. In that year Prime Minister Manley survived what many believe to have been a CIA-backed destabilization campaign, a drastic decline in tourism (one of the nation's chief sources of foreign exchange), and capital flight perpetuated by many of the nation's wealthier citizens, to win a second term of office. Since that year, however, the commercial banks had insisted on agreement with the IMF as a condition for rolling over loans. Even then, they had been willing to roll over only seven-eighths of the capital, not the full amount, leading to a ,gradual reduction of exposure. On April 15, Jamaica's new finance minister, Hugh Small, announced that the banks had agreed to continue the roll-over arrangement, despite the failure to negotiate with the IMF. This apparently represents a temporary standoff. The Jamaican government had requested a roll-over agreement for all its commercial loans, since the suspension of its I M F financing makes any debt servicing more difficult. Additionally, the agreement is subject to review by the banks each month. The banks, for their part, drooped their opposition to any refinancing without IMF participation because they recognize that overt bank hostility could provoke Jamaica to repudiate its obligations unilaterally, whereas the government continues to express its willingness to honor them. - Cheryl Payer