In the opening session of last month’s World Bank/IMF meeting held in Washington, IMF Deputy Managing Director Stanley Fischer said the G-7 no longer has the political will unilaterally to bail out countries in danger of default. He and others insist the private sector help share the burden, or “bail in.”
As it is, bailing in is the proposed solution to the problem of moral hazard among investment bankers. And, to the extent it would help deter bringing sub-standard credits to market, the idea does make sense. But how the private sector should bail in is hard to say, especially in the complex case of Ecuador and the default on its Brady bonds. “There is a lot of ambiguity in involving the private sector in crisis resolution,” Fischer admitted. He added, “Hard cases make bad rules, and Ecuador is a very hard case.”
However, some would argue the IMF-largely at the US Treasury’s insistence-has in fact made an example out of Ecuador. Its reluctance to bail out Ecuador when it has responded in a timelier fashion to other countries’ needs (most recently Colombia’s) brings some deep-seated concerns to the surface.
As we’re seeing today the multilateral organization has come under fire in the aftermath of the Asian and Russian crises, but ever since the second half of the 1940s the IMF has served to promulgate economic liberalization and democratization, the bastions of Western tradition. In that light, the G-7 nations have scrambled for a solution to the problem of bailing out distant countries yet preserving the IMF: Their answer is to divvy the burdens of those countries needing assistance.
Sharing the burden, the argument goes, ought to bring together the official community, private creditors and the debtors. It implies that debtor nations do their part by passing the kinds of liberal economic reforms that would prevent them from falling into such trouble again, and it implies they show a willingness to negotiate with their creditors.
The ideal is simple but the reality is fraught with concerns that quite naturally will take time to resolve.
In Ecuador’s particular case, the government worried that if it were to go forward with more reforms and show a willingness to negotiate new terms, bank creditors would turn their backs anyway. The creditors certainly are not obliged to lend or underwrite. Second, investment bankers and other creditors were fretting over the possibility that institutional investors would not support their efforts-given the influence of daily headlines and market impulses. Investors, after all, are certainly not obliged to buy into any rated loan or bond issue, even less from a country making the evening news. Third, if debtors, creditors and investors did not show willingness to share, then the IMF was left back where it started. With the attacks mounting, the multilateral obviously wanted to change that.
However, the entire international community acted disgracefully by allowing Ecuador to fall through the cracks. For the IMF to fold to political pressure without having hammered out an adequate alternative that all players could agree to is unacceptable. For private bankers to sit by quietly and allow it to happen is equally unacceptable. Since Ecuador is a small nation and its official and unofficial debt load is but a drop in the bucket of the global markets, there was not much that the official community or the banks would lose. That’s precisely why all players involved dilly-dallied, despite the Ecuadorian government’s attempts to please and the Ecuadorian people’s extended suffering.
As unfortunate as it is, Ecuador may in fact have been singled out by the Fund not only for its small size but because it suffers from traditionally fractious legislatures and political corruption. Compromise is nearly impossible there. Under those conditions, the IMF can easily point a finger at the government’s inability to meet the required reforms, hence funding can be withheld.
In the end, it’s to hell with finding a kinder, gentler, more patient way to share the burden. The IMF is under political pressure to act now instead of later, private creditors don’t ever want a second haircut again, and, after all, we’re only talking about the pain of some 12 million people.