The IMF's 'social safety net' for the institutional speculator

Although the avowed objectives of the International Monetary Fund's expanded overdraft facility is to replenish the Central Bank reserves of countries facing a financial crisis, in practice it constitutes a convenient 'social safety net' for the speculators.

by Michel Chossudovsky

AT the pompous 50th Anniversary Jubilee of the Bretton Woods Agreement celebrated in Madrid in 1994, the Managing Director of the IMF Mr Michel Camdessus had presented a plan to provide more IMF resources to developing countries. The global media immediately hailed Camdessus as the South's progressive spokesman against the narrow political interests of the rich countries.

Mr Camdessus repeated his plea at the Halifax and Lyon G7 summits, urging G7 governments to provide additional resources with a view to securing a 'durable, more broadly based sustained high-quality growth [with a view to raising] living standards worldwide'. At the Denver Summit in June 1997, the Group of Seven finance ministers finally conceded to the IMF's demands to double its $28.5 billion overdraft facility to central banks with a view to averting 'the dangers of Mexican type currency crises'. The timing was right: the Denver Summit coincided with the onslaught of the Asian currency crisis. ASEAN countries facing speculative moves against their national currency would be eligible for support under the IMF's expanded overdraft facility for central banks.

In recent years, the overdraft facility had been used by the IMF as a 'carrot' to enforce trade liberalisation and financial deregulation invariably triggering a balance-of-payments crisis and weakening (rather than strengthening) the countries' national currency. In practice, by periodically replenishing official reserves on borrowed money, the facility also constitutes a convenient 'social safety net' for the institutional speculator. The latter is enticed by the large amounts of borrowed foreign exchange stashed in the coffers of developing countries' central banks.

The Thai rescue operation

The Royal Thai Government was the first beneficiary under the expanded overdraft facility. From the outset of the Asian currency crisis, Bangkok's official reserves had been depleted by more than $10 billion in vain efforts by the Thai Central Bank to defend the Baht. Some $3.6 billion had been appropriated by speculators in the two-week period from 15 to 29 August 1997. In the largest rescue operation since the Mexican crisis of 1994, a $17.2 billion loan was put together under the IMF overdraft facility (with contributions from the IMF, Japan, Australia, Hong Kong and a number of ASEAN countries). While the financial package served to temporarily shore up the Thai Baht, the strict 'policy conditionalities' imposed by the IMF are likely to further exacerbate Thailand's foreign exchange crisis. The Thai economy has been weakened; there is a danger that these 'borrowed reserves' will once again be depleted in a renewed surge of speculative activity.

In the week following the approval of the IMF rescue operation on 21 August, official reserves continued to tumble. In turn, the Thai Central Bank had accumulated outstanding contracts of some $23 billion on the forward market (over the next 12 months). The borrowed reserves will be reappropriated: the entire $17.2 billion IMF rescue package will be used to meet these outstanding forward contracts largely to the benefit of the institutional speculator. In fact most of this money will never enter the coffers of the Thai Central Bank, it will be released by the creditors when the forward forex contracts reach maturity.

Hidden agenda

The hidden agenda behind the IMF overdraft facility is to tear down central banks in South-East Asia thereby thwarting the possibility of financing economic development from within. No need to build up foreign exchange reserves from trade surpluses: central banks are now encouraged to routinely replenish their reserves on borrowed money. In several countries in Africa, Eastern Europe and the Balkans, central banks have already been replaced by colonial style 'currency boards'. Under this set-up, monetary policy is administered by an expatriate governor appointed by the IMF.

Undermining the 'Asian Miracle'

The currency crisis as well as the policies imposed on central banks by the IMF are conducive to the demise of the so-called 'Asian Miracle' - which until recently was heralded by the Bretton Woods institutions as a model of economic success. National capitalism in Malaysia and Thailand is to be torn down; external creditors, IFIs as well as merchant banks are taking over the reigns of monetary policy.

Through economic and financial manipulation, South-East Asia's 'economic tigers' have been transformed into 'lame ducks'. The objective consists in removing the remaining bastions of trade protection. The latter rather than 'free trade' had enabled several ASEAN countries to develop a strong export base as well as accumulate substantial foreign currency reserves.

Speculators and creditors

Under an expanded overdraft facility, central banks would not only be able to borrow 'paper gold' from the IMF, they would also have access to lines of credit provided by bilateral sources. The large merchant banks are also involved in propping up developing countries' official reserves by underwriting billions of dollars of commercial loans and bond issues to central banks. Ironically these same creditor institutions are also routinely involved in currency speculation. In July 1997, for instance, ING Baring (well known for its activities in derivative trade and the Forex market) formally offered to underwrite a $1 billion Euronote issue for the Banko Sentral ng Pilipinas with a view to propping up the Peso. Two months later in the August-September frenzy on Asia's currency markets, the BSP sold large amounts of its dollar reserves on the forward market: a large chunk of this borrowed money was transferred back into private hands.

A social safety net for international speculators

The speculators, the IFIs and the commercial creditors of Asia's central banks essentially belong to the same group of financial and banking institutions representing broadly the same interests. Replenishing reserves on borrowed money (while temporarily attenuating financial instability) does not contribute to protecting national currencies. These borrowed reserves constitute a 'social safety net' for the institutional speculators. Not surprisingly, the latter also exert pressures on G7 governments and the IMF to expand their lending activities to central banks.

The process operates as follows:

1) Currency speculation leads to draining official central bank reserves, central banks enter into contracts on the forward market with a view to propping up the national currency;

2) The reserves are replenished on borrowed money under the IMF overdraft facility as well as through international bond issues underwritten by merchant banks; borrowed money is used by the central banks to meet outstanding forex contracts.

3) The countries' balance of payments crisis is heightened as a result of the policy conditionalities imposed by the IMF;

4) The balance-of-payments further deteriorates leading to pressures on the national currency. The borrowed official reserves are reappro-priated by international banks and financial institutions in a renewed surge of speculative activity.

5) A new round is initiated: official currency reserves are built up again in anticipation of the next speculative surge....

At each stage of this process, external debts build up and creditors, IFIs (not to mention the merchant banks and the institutional speculators) gain political leverage over the conduct of national macro-economic policy.

(TWR No. 86, October 1997)


The writer is Professor of Economics at the University of Ottawa and has written widely on issues of international finance and macro-economic reform. He is the author of The Globalization of Poverty, Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997.

Copyright by Michel Chossudovsky, Ottawa, 1997. All rights reserved.

The author can be contacted at ,fax: 1-613-7892050