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As leaders from around the world prepare to descend on Washington November 15th for a Group of 20 summit to tackle the global financial crisis, the United States is saying that a statement of principles (or is that platitudes?) and the establishment of some working groups would constitute success. The Europeans, particularly Prime Minister Gordon Brown of Britain and President Nicolas Sarkozy of France want to establish a process that moves toward some sort of new international-financial/economic system, although they are still quite divided on what this would mean in terms of regulation for financial institutions or—the key point—capital flows. The emerging markets, who will be very important participants, are not yet putting their cards on the table.
There is another, more pressing potential agenda item currently being discussed (mostly behind closed doors): the International Monetary Fund (IMF) needs a lot more money.
While this issue may not come to the forefront in public discussion, as markets are now relatively quiet, if there is a major downturn in sentiment or if the news about the real economy in the United States and elsewhere is sufficiently dire, this issue (and all that goes with it) may well find itself right in the middle of the negotiating table—perhaps as early as the G-20 finance ministers' and central-bank governors' meeting in Brazil this weekend.
The powers-that-be (read: the United States, United Kingdom, and France; probably not Germany) have over the past week or two made their approach to the globalization of the crisis clear—they want the IMF to fund continuing growth in emerging markets. In the age-old choice between "adjustment" (tight money, painful fiscal contraction, etc.) and "financing" (borrow more) to deal with external payments problems, the G-7 and their friends would like the emerging markets to finance, big time. This will keep world growth higher and thus keep the G-7 (and their banks) from getting into even deeper water.
It is risky, of course, because global deleveraging—the big contraction in global credit that is likely already underway—means lower asset prices, including lower commodity prices, and most likely a reduction in global growth for the foreseeable future. Cushioning the blow is fine, but commodity exporters need to do some adjusting and all emerging markets may need to cut back to some degree in order to keep things sustainable. And someone (in or around the IMF) has to decide how much growth in emerging markets is "right" for this situation.
In particular, in the global strategy we now see forming, a key issue for sizing IMF (and related) resources is credit growth in emerging markets. This has been high, fueled in part by loans taken out in foreign currency, i.e., borrowing from abroad. The effects of this now, in terms of slowing growth, are most obvious in East-Central Europe, but are beginning to be felt in many emerging markets. The private sector is cutting back on its lending to emerging markets. How much does the IMF want to step up and fill this gap? The publicly available information on the Hungarian program suggests an answer: a lot. (The final program details will likely be published early next week, and then we can run the numbers properly.)
Now, there are many options for increasing the resources for IMF programs, including the funds that it brings as a so-called catalyst (this could be from the European Union for EU members like Hungary, or from other countries/groups on a case-by-case basis). But given the nature of this crisis, it would be good to announce at least some of the resources that are available. Among other things, this would signal the scale of further monies that would be made available if needed.
The IMF has $200–250 billion in available resources. They put $100 billion into what we are calling their Express Boarding Lane (i.e., keep your policies basically as they are; have some money). About $50 billion is probably already spoken for, in lending to about half a dozen confirmed and likely customers. Clearly the remaining $100 billion is not enough for the rest of the world, particularly if the idea is to help finance continued high growth, rather than to force painful adjustment.
How much is enough? That is not the right question. The right question is: How much would convince the market that the IMF can draw on the essentially unlimited pockets of the G-20 in order to achieve just a gentle slowdown in world growth? Clearly $50 billion would not do that, and I doubt that $100 billion could now be decisive. I have floated $1 trillion (trillion, with a "t") as a plausible amount, around which to open discussion. Unofficial reactions to this so far have been positive, but let's see what we hear officially.
This article is an adaptation of a posting by Mr. Johnson at Reuters Macroscope and also Mr. Johnson's blog, Baseline Scenario.
