The Multinational Monitor


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Congress and the IMF

Congress swallows IMF rationale but bargains for control over banks - A report on the IMF funding debate

by Jonathan Friedland

Rarely has the arcane world of international finance been more in the Congressional spotlight than during the past five months as lawmakers argue over an $8.4 billion increase in the U.S. contribution to the International Monetary Fund (IMF). Both bankers and the Reagan Administration claim the increase must be passed to prevent recurrences of last year's debt crises. Congress, however, has jumped on the opportunity to chastise imprudent bankers for their overseas lending practices by reviewing and adding restrictions to the increase.

The actual quota increase is not the contentious issue - the IMF has asked for and gotten raises in the U.S. contribution in past years and Congressmen accept the IMF as the legitimate broker between the banks and the Third World. The increase is rather the vehicle that politically savvy Congressmen have chosen to express their displeasure with the adventurous, and often reckless, lending policies of U.S. overseas lenders.

Much of the debate has centered around the question of whether the quota increase would amount to a bank bailout. Between 1973 and last year, U.S. bankers increased their lending to the developing world by almost 20 percent annually. Bankers viewed these loans as relatively risk free, and by charging high interest rates and fees, reaped enormous profits. Almost half of the profits generated by the ten largest U.S. banks last year came from their international operations.

But a combination of recession in the industrial world and declining terms of trade in the Third World ended the picnic during the summer of 1982 when Mexico was forced to reschedule, or put off payment on, its foreign debt of more than $60 billion. Since that time, Argentina, Chile, Brazil, and a host of other countries have sought to postpone repayment on their foreign obligations.

As debt crises have become more numerous among Third World countries, the IMF has played a greater role in negotiating the terms of adjustment strategies for a continuing flow of capital. Both the banking community and the Reagan Administration have lobbied for the passage of the increase so that the IMF would have greater resources with which to provide adjustment financing to countries that were already in debt.

Together, they have apparently succeeded in convincing Congress that an IMF-guided readjustment of the world economy was the only hope to avoid threatening instability in the Third World. Instead of calling for ceilings on the percentage of assets that banks can lend overseas, as was originally envisioned by Senators John Heinz and William Proxmire, Congress has adopted a more moderate approach that has yet to be fully reconciled.

The full sum of $8.4 billion has already passed the Senate and in the House Banking Committee. While both versions of the bill create lending disincentives, the House version is tougher - spelling out higher required levels for reserves to be set aside when repayment look dubious and limitations on how banks can record the fees charged for reschedulings. The House version is expected to be even more stringent by the time it reaches a floor vote, perhaps as early as late July.

Opponents of the bill, such as Conservative Senator Jesse Helms, base their op position on the assertion that U.S. taxpayers are being asked to bail out commercial banks that lent billions to borrowers with little ability to repay. "Taxpayers ought to send a posse after the Senate if it passes this bill," said Helms shortly before the bill was passed on the Senate floor. More moderate conservatives such as Jake Garn, Chairman of the Senate Banking Committee hesitantly backed the increase on the grounds that continued loans to the Third World are necessary if the U.S. is to beat the current recession.

When the Senate finally passed its version of the bill during the second week of June, it was clear that the rhetoric emanating from the Right had been significantly compromised. The Senate version requires banks to set up reserves for bad loans when they lend to a country that is having "protracted difficulty" in meeting its obligations to the IMF. Currently the only major Third World debtor that would fall in that category is Zaire. The Senate version also contains provisions that would force banks to stretch out their rescheduling fees over the life of a loan package rather than recording the fees as current income when the deal is made, a practice known as 'front-ending.' With fees as high as 1.5 percent of a several billion dollar loan, banks have been able to overstate their current earnings to stockholders.

However, it is on the floor of the House that bankers will see the toughest restrictions go to vote. House Banking Committee Chairman Fernand St. Germain of Rhode Island has been in the unenviable position of guiding the bill through his ranks. An unusual alliance has been wrought in support of the bill, bringing conservative Republicans and liberal Democrats together in an effort to attach more stringent restrictions than on the Senate side. Representative Jack Kemp of New York - who opposes IMF policies on the grounds that they dictate to developing nations monetary and fiscal policies that he is ideologically at odds with - and liberal Representative Charles Schumer also of New York have led the battle to turn the restrictions into law (see interview, p. 18).

The final committee version of the bill requires U.S. banks to establish special reserves whenever there is a likelihood that the debt cannot be repaid in accordance with the original terms. Both versions of the bill would require banks to retain more assets in reserves than they have in the past, limiting profits since reserves would be left dormant.

Among other reforms approved by the House Banking Committee are: more disclosures by the banks, assurances that the banks can sustain losses on outstanding foreign loans and civil penalties for banks which do not obey the rules. Banks will be fined up to $1000 a day.

While the bill stops short of forcing banks to reschedule short term debt over longer periods as bankers Felix Rohatyn and George Champion have advocated, or legislating lending ceilings as Proxmire and Heinz originally called for, it will allegedly make it less profitable for U.S. banks to lend to countries that are already in debt.

"We owe it to the American public to make certain that we know what U.S. banks are doing overseas and that activity is conducted in a sound manner," said St. Germain.. He added that Congress cannot ask the taxpayer to put up the $8.4 billion to "clean up this financial mess while we say to the bankers: business as usual."

If the harder-line Congressmen feel that St. Germain's committee version of the bill is not strict enough, Kemp and Schumer are waiting in the wings to introduce a bill similar to one introduced and beaten back before the committee. The bill calls for the conversion of shortterm, high interest debt to longer-term debt with softer terms for repayment. Schumer claims that countries need more breathing time to get their balance of payments back into order.

The banking community is already stepping up a last-ditch lobbying effort to prevent any more riders to the bill - especially the stretch-out provision. The American Banking Association (ABA) has stated that the current versions of the bill - even without the Schumer-Kemp rider - creates "unbearable conditions" for bankers.

"Congress always has to blame someone else than itself," said a senior Boston banker. "They want to divert attention to someone else." ABA and other banking lobbyists are hoping to stall a vote on the House floor while they convince the lawmakers that the conditions are unnecessary. Still other groups - mainly right-wing lobbyists who are opposed to any expenditure of U.S. taxpayer money on foreign countries - are trying to block the quota increase entirely. If the House passes the increase, it will go on to be discussed in conference committee where a compromise version will be hammered out. "The banks and the right will try and knock the bills around in conference committee," said a Congressional staffer, "but no one will accept a watered down version. It's all or nothing."

Third World diplomats and bankers are also wary of the restrictions, although they strongly support the quota increase.

"I think that any kind of measure that results in reducing liquidity or raising the cost of money will be bad for debtor nations," said one Brazilian diplomat. "The stimulus for lending will be much less. We are insisting on greater access and these regulations will only narrow the access."

At this point, Congressional sources admit that the outcome is unclear and many shake their heads over the fact that the quota increase has become the battle ground where Congress took on the banks.

Another rider attached to the IMF quota increase is a measure that calls on the U.S. representative at the IMF to "actively oppose" any loans to South Africa. The amendment - sponsored by Congressman Julian Dixon of California - comes in the wake of a major controversy sparked by the IMF executive board's vote last November to approve $1.1 billion in loans to South Africa.

Supporters of the amendment claim that they have enough votes to block the quota increase if the restriction is not included in the final version of the bill. They claim the bill has a better chance that any previous attempts to legislate restrictions on bank lending to the minority-ruled state. The Reagan Administration has opposed the legislation "very firmly" on the grounds that the restrictions would give the Pretoria government the wrong signals. Its policy of `constructive engagement' is designed to assure South Africa of continued favorable ties so that, the administration says, Pretoria will move towards agreeing to independence for Namibia and liberalization of apartheid at home. However, critics of the loan have made the observation that the $1.1 billion roughly equalled the cost of South Africa's war in Namibia and Angola over the past two years. South Africa announced in late June that it would repay the controversial loan ahead of schedule.

Although last November's loan encountered unprecedented opposition among Third World representatives to the Fund's board, the combined voting power of the Western Europeans and the United States ensured approval of the loan. U.S. Executive Director Richard Erb led the drive among board members to approve the loan which was being contested on economic as well as moral grounds. But if the Dixon measure is passed, the U.S. representatives will be forced to refrain from the partisan lobbying in South Africa's favor that Erb has undertaken in the past.

Jonathan Friedland is a freelance journalist for Inter Press Service and South Magazine.

Loans to Third World Countries by Top 10 U.S. Banks

Mexico and Brazil alone receive 70% of these banks' Third World loans
(dollar figures in millions)

Bank Mexico & Brazil loans Total Third World loans As % of equity As % of loans
Citibank 7,630 9,810 203 11.4
BankAmerica 4,800 6,800 148 9.2
Chase Manhattan 4,049 6,073 220 11.0
Manufacturers Hanover 3,744 6,811 245 16.0
Morgan Guaranty 2,770 4,072 150 12.8
Chemical Bank 2,800 3,541 182 11.5
Continental Illinois 1,185 2,029 119 6.2
First Interstate 1,154 1,154 64 4.7
Bankers Trust 1,750 2,225 143 10.6
Security Pacific 1,015 1,190 80 4.8
TOTAL 30,897 43,705 169 10.3

What's a Law to the Reagan Administration

The Reagan administration has ignored 1980 legislation that might have softened the harsh impact of IMF policies. Known as the Reuss-Cavanaugh amendment, the law requires the U.S. Executive Director to pressure the IMG to protect the basic human needs of a country's poorer citizens when it negotiates the conditions for a loan.

The law, passed as part of a previous IMF quota hike, amends the founding legislation of the IMF. But despite its three-year standing, the IMF continues to approve loan plans that devalue the national currency, raise the price of food and industrial and agricultural capital, restrict employment and income, and slash programs promoting health, education and clean water - all with the tacit approval of the U.S. executive director.

Specifically, the amendment instructs the U.S. executive director to push formally and informally at the IMF for longer term loan plans that require both the borrowing country and the IMF to specify how development plans and basic human needs will be protected. Instead, U.S. and IMF officials at both the staff and policy levels are either unaware or uninterested in this instruction. In fact, the Reagan administration has worked in precisely the opposite direction by successfully pushing for short term plans and harsher conditions.

The amendment also instructs the U.S. executive director and the IMF and the World Bank to formally propose a general policy of coordination between the bodies, in which the World Bank would fund the development programs and basic human needs that would usually be damaged during the adjustment period. Again, there has been no attempt to act on the instruction.

Finally, the amendment requires the U.S. to draw up its own assessments of the probable impact of individual IMF plans on development and needs of the poor, if the IMF rejects U.S. calls (which, as noted, have never occurred) to do so itself. The U.S. executive director to the IMF is to consider these assessments when voting on IMF loans. Instead, the staff has drawn up cursory documents and the director has given the matter no consideration. In fact, the administration has argued that taking these assessments seriously and voting against plans that appeared likely to damage development and the needs of the poor would itself disrupt the IMF, and so indirectly damage development and basic human needs.

When countries fail to meet the conditions they agreed to in return for loans from the IMF, disbursements on their loan remain on "stand-by" status in the hands of the IMF. The administration's miserable performance on the Reuss-Cavanaugh amendment suggests an appropriate analogy. Congress should tell the administration that the currently proposed increase remains on stand-by until it can pass a "test of cooperation" (one of the IMF's favorite, nebulous conditions) on this amendment.

- Caleb Rossiter

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