More US help for overseas loans: a drain or a gain for US economy?
The International Monetary Fund (IMF) is expected to act this week to boost the organization's resources by 50 percent, thus improving its ability to help developing countries cope with a staggering debt burden of about $500 billion.
Proponents argue that increasing the IMF's loan resources would help shore up world financial markets, which have been shaken by debt repayment problems experienced by various nations including Mexico, Argentina, and Brazil. The IMF lends money to nations to help them meet foreign debts.
But for the plan to be successful, Congress must approve an estimated $9 billion increase in the United States share of the IMF budget. Given current economic circumstances, that is a tough sell on Capitol Hill.
''At a time when millions stand in the unemployment lines and thousands of small businesses are filing bankruptcy petitions, the idea of an international bailout for adventurous bankers may not be the most popular item on the legislative agenda,'' says House Banking Committee chairman Fernand J. St Germain (D) of Rhode Island.
''If you are going to lend $9 billion to anybody, why not provide it to home builders or automobile buyers?'' asks William Proxmire (D) of Wisconsin, a member of the Senate Banking Committee.
So the debate over higher US aid to the IMF is already focusing on how giving additional aid to the IMF - or withholding it - would affect main street America.
The IMF needs money because its resources have been badly depleted by recent calls for help in riding out the world recession. The fund recently committed $ 3.9 billion for loans to Mexico and more than $2 billion for Argentina. And it is studying a request for $5.9 billion from Brazil. Government officials and bankers, who generally support increased aid for the IMF, argue that additional resources for it will help keep the world trading system from serious damage, which would hurt American companies and their employees.
Federal Reserve chairman Paul Volcker noted in recent congressional testimony that ''failure to deal successfully with the immediate international financial pressures could only jeopardize prospects for our recovery, our jobs, our export markets, our financial markets.''
Without additional help for debtor nations from the IMF, commercial banks might sharply cut their lending. As a result, trade would fall to match the lower level of available financing, Treasury Secretary Donald T. Regan argues. In such a scenario, US economic growth would be 1 percent less than expected, he says. This would trim gross national product (GNP), because of the loss of $12 billion in US exports to the developing world.
''The developing countries have become among the largest and most rapidly growing markets for US exports,'' notes C. Fred Bergsten, director of the Institute for International Economics. Overall, 20 percent of all US goods and 40 percent of US agricultural output are exported.
'If the increase is not approved, everyone concerned will have to adjust,'' George J. Clark, executive vice-president of Citibank, recently told the House Banking Committee. He warned that voters will have to adjust to ''lower demand abroad for US exports, thus reducing job creation in your districts' manufacturing and farming sectors, where unemployment would remain at higher than necessary levels.''
Stepping up US support for the IMF ''is one of the most important jobs bills to come before this Congress,'' Mr. Bergsten says.
In addition, if debtor nations stopped paying their debts, US banks would have to recognize loan losses. These losses would reduce the banks' domestic lending ability.
Nevertheless, ''an IMF increase would in no way constitute, as some have suggested, a bailout of the banks,'' argues William S. Ogden, vice-chairman of Chase Manhattan Bank. That is because the IMF is requiring additional bank loans to debtor countries as a condition for IMF approval of rescue packages. He added that ''of course'' banks would benefit from an increase in IMF funding.
It appears that tighter controls on banks' foreign lending practices may be the price bankers and the administration would have to pay for increased IMF funding. In an opening statement at recent hearings, Mr. St Germain said, ''It is essential that this committee look past the immediate requirements of the IMF and examine closely the role of US banks and the performance of US financial regulators as this debt has grown.''
The cure for problems of international finance, he went on, must include ''more-creative regulation.''
Senate Banking Committee chairman Jake Garn (R) of Utah has not taken a formal position on increasing US contributions to the IMF. ''He is generally supportive of increasing the quota, but wants to take in everything from (legislative hearings) in light of the overall economic picture,'' an aide says.
While increasing aid to the IMF has significant political consequences, it would not affect the US budget deficit. In return for the dollars it uses, the IMF provides offsetting credits on its books that earn interest. So for bookkeeping purposes, the result is considered an exchange of assets rather than an expenditure.
The expected 50 percent increase in IMF loan resources would boost the IMF's capitalization to $98.9 billion, from $65.9 billion. But only about half of the funds the members contribute is in a form that is lendable.
There are two components of the $9 billion increase in IMF funding Congress will likely be asked to approve. About $6.8 billion would go to supplement the current US membership quota of $12.6 billion.
And $2.2 billion more would boost the current $2 billion US share of an emergency fund called the General Agreements to Borrow. In January the US and 10 other wealthy nations agreed to increase this fund from its current $7.1 billion level to $19 billion.
If Congress does not support the US increase, it will have major economic consequences, experts conclude. Failure to provide additional funding ''would be the contemporary equivalent of the congressional adoption of the Smoot-Hawley Tariff in 1930,'' Mr. Bergsten says. ''The resultant devastation of international financial arrangements could bring on a worldwide depression, with enormous effects on our own economy and society.''