What To Make Of US Senate Conditionality on IMF Funds

Late Monday the US Senate approved, by an overwhelming majority (94-0--and who said bipartisanship is dead?), an amendment to the financial regulation overhaul bill that prohibits the US support for IMF loans to countries that aren't likely to repay them. In particular the amendment requires the Treasury Dept to certify whether a loan by the IMF to a country with a public debt to GDP of more than 100% can be repaid.

The equity market and the euro had appeared to be stabilizing late in the North American session, but this news seemed to undercut the stabilization. The euro dropped 3/4 of a cent and Asian equity markets opened broadly lower at least partly on ideas that the US may torpedo the recent IMF/EU/ECB stabilization efforts.

Recall that at first some Europeans, including the ECB, did not want the IMF involved with the European debt crisis precisely because of the US veto at the IMF. This would seem to play directly into those fears. It may also be seen as part of a larger weakening of the Atlantic Community. For more than a quarter of century now more trade--and standing in a reversal of the past several hundred years--is conducted over the Pacific than the Atlantic. The US is a Pacific power and an Atlantic power in fundamental way and a way that Europe is not. There is also a military element and signs of strain in NATO.

To be sure, the amendment is not law yet. It is part of a larger bill that has to be voted on by the entire Senate and then reconciled with the House version. But even if the amendment survives and the bill becomes a law, it is largely bluster. The reason is simple: The IMF has a simply astounding track record. While there are cases of countries falling in arrears, it has nearly always been repaid in full. The default rate is virtually nil.

This is not to say that all criticisms of the IMF are baseless. There may be times, where an early default rather than loans may be a "better" alternative, for example. However, it is not guilty of giving away money. Repaying the IMF often comes ahead of other creditors and social priorities.

The Senate's amendment's bark then is worst than its bite. It won't really change matters if the amendment survives the legislative process. Outside of Greece, no other euro zone country has requested funds from the IMF. The IMF does not give money to a region. It has country specific programs.

Increasingly, the $250 bln that has been suggested is the IMF's share appears to be little more than a ball park estimate of the kind of money that could be made available. But it is no specific commitment--outside the Greece program. If private sector institutions had as good of a track record as the IMF in being repaid, the Senators would not have to spend so much time on financial reform.