CAMBRIDGE – As the global financial crisis radiates out from the developed economies into emerging markets, it is ravaging not only governance-challenged economies such as Venezuela, Russia, and Argentina. The crisis is also striking countries like Brazil, Korea, and South Africa, which appeared to have made substantial and lasting progress towards macroeconomic stability. For this reason, the future shape of the International Monetary Fund is rapidly moving to the top of the agenda for world leaders as they prepare to meet in Washington in mid-November to discuss the future of the global financial system.
Just a short time ago, the IMF seemed relegated to a sustained period of irrelevance as it failed to modernize either its euro-centric political representation or its arcane government-to-government lending facilities. Suddenly, the Fund has moved to center stage as the only agency seemingly capable of stemming the vicious downward spiral that is currently seizing emerging-market stocks and bonds.
World leaders should be happy that the IMF stands ready to take the lead in the next phase of the global financial crisis, even if its lending resources of approximately $250 billion are inadequate to stem the current run on emerging markets. Emerging-market companies alone have hundreds of billions coming due in the next twelve months, far more than their governments’ reserves can cover if credit markets do not normalize.
Unlike United States Federal Reserve chairman Ben Bernanke, most emerging-market central bankers are in no position to extend blank checks across their economies without a boomerang effect on interest rates and exchange rates. (We will see how investors judge the dollar once the smoke clears and the huge expansion of US money and debt becomes evident.)