Financial crisis, Part 2

Developing countries need urgent help. The IMF is acting quickly, but it needs help, too.

First came the financial earthquake in the US and Western Europe. Now, the aftershocks are shaking the developing world. Countries from Ukraine in Eastern Europe to Pakistan in South Asia need urgent financial attention. Helping them requires a global effort.

It wasn't long ago that many of these countries – known as "emerging markets" in finance lingo – were thought to be immune to financial problems in the developed world. Their governments had decent balance sheets, had paid back international loans, and even stored up funds in "rainy day" reserves. In fact, they were being talked about as engines that could pull America and other wealthy countries out of recession.

But now they're suffering, too. Demand for their goods and commodities is drying up as the great consumer market of the world – the US – folds its wallet.

Even worse, jumpy foreign investors are pulling out of the emerging-market countries, and that's caused currencies in Brazil, Mexico, South Korea, Turkey, South Africa, Hungary, and elsewhere to plummet. With weak currencies as well as foreign capital on the run, banks and companies in such countries – and in some cases, governments themselves – are unable to borrow or pay off loans.

There are multiple dangers here. For starters, America's climb out of recession will be all the more difficult without emerging markets to grab on to. At the same time, banks in Western Europe are neck-deep in shaky loans to these countries. One example: Austrian banks' outstanding loans to Eastern Europe are worth more than half of Austria's economic output, or gross domestic product. Default on these loans would spell financial disaster for East and West Europe.

And don't forget the geopolitical considerations. Several of the former Soviet states that are now democracies are in serious financial trouble. And nuclear-armed Pakistan – a weak democracy that is home to Al Qaeda and Taliban terrorists – needs close to $5 billion just for short-term survival.

Thankfully, the world is not standing idly by. The International Monetary Fund (IMF), made up of 185 countries and their donations, is acting with speed, muscle, and flexibility.

Last week, it agreed to loan $2 billion to Iceland and $16.5 billion to Ukraine. This week, it worked with the World Bank and European Union to assemble a hefty $25.1 billion rescue package for Hungary. It is in talks with Pakistan.

One complaint about the IMF is that it sets stringent austerity conditions on its loans, just when countries are hurting. This week, however, it announced $100 billion in short-term credit for countries that are basically sound, but have become victims of capital flight and currency devaluation. No strings attached. That's a wise and welcome move.

The IMF is doing exactly what it was set up to do, but will likely need more help. It has a total of $250 billion that can cover small- and medium-sized countries. But economists predict 15 to 20 emerging markets will need assistance, and if a big one like Brazil comes knocking, the IMF won't have enough.

This is a good topic for the global economic summit next month. As Americans have realized that Wall Street and Main Street are connected, so the developed world needs to understand that it's in this together with the developing one.

You've read  of  free articles. Subscribe to continue.
QR Code to Financial crisis, Part 2
Read this article in
https://www.csmonitor.com/Commentary/the-monitors-view/2008/1031/p08s01-comv.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe