Toward Better Rescues
Defects in the system for rescuing financially troubled nations have become glaring.
"Something appears to be amiss in the international economy," says a United Nations report.
"The prevailing system of international lending is fundamentally flawed," echoes billionaire financier George Soros in the Financial Times.
For one thing, the system hasn't stopped east Asia's financial turmoil from threatening the world's economic welfare.
Another flaw is that the present system favors creditors over borrowers. That usually means industrial nations over developing countries.
The bailout process works something like it might for a college graduate piled high with student loans and credit card debts. Not all his purchases were wise, but many were. He can't make payments. Dad steps in, digs up a loan himself, and finds a consolidation loan. It stretches out repayment over more years at a higher interest rate. The banks which bombarded the callow youth with cards take no loss. It isn't fun.
In Asia's bailouts, overly eager lenders also may come out relatively whole. Some of their loans to banks or industrial enterprises in an emerging market are to be taken over by that nation's government. Thus a risky loan, rightly paying high interest rates, suddenly becomes more secure, probably even at a higher rate.
Meanwhile, consumers and mom and pop businesses (and occasionally big business) in a crisis nation suffer from the stringency the International Monetary Fund, the tough Washington-based lender of last resort, imposes when it puts together a rescue loan package. Shape up, lads, the IMF says. Its goal is to restore international investors' confidence and put that nation's international payments balance into the black.
Solutions aren't easy.
Mr. Soros proposes creation of an International Credit Insurance Corp. as a sister to the IMF. It would guarantee international loans for a modest fee. Borrowing countries would be obliged to provide data on all loans, public or private. This would enable the new agency to set a ceiling on the amounts it is willing to insure. For any loans beyond that, lenders would be on notice of potential danger.
On the other side, Ian Vasquez, an analyst at the libertarian CATO Institute in Washington, proposes letting the free market take care of the crisis. The IMF, he says, should abandon the rescue business. This would force debtors and creditors to negotiate a "quicker and fairer" deal. They would share losses. The IMF wouldn't be able to impose loan conditions that hurt innocent bystanders - namely the public in emerging nations.
Both proposed solutions go too far. Leaving it entirely to the wonders of the free market is too risky. There could be a domino effect, with failing lenders knocking down weak creditors. Private money does on occasion take flight in panic, moving like sheep in an irrational herd. Free market solutions can be excessively harsh.
Nor do we think the world needs yet another global agency. It isn't clear loan guarantees are the answer.
What is needed is greater "transparency" in financial institutions in emerging nations - that is, valid, comprehensive information on their borrowings. The IMF has been pushing these countries to open their books. It is seeking the power to be a bigger snoop on capital flows. The Institute of International Finance (IIF) in Washington, representing major private financial institutions, also attempts to dig out numbers.
More accurate statistics are needed if private lenders are to make wiser foreign loan decisions. There should be no surprises, like in South Korea, where billions in unsuspected loans to businesses suddenly surfaced.
The IMF and the IIF must insist on greater transparency - a policy that would discourage the cronyism and corruption that plagues many emerging nations in Asia. A needed moral dimension could thus be inserted into foreign loan decisions. At the same time, regulators within these countries must learn to restrain the short-term borrowing that got so many banks and companies into trouble when foreign confidence tumbled.