Sunday, October 26, 2008

The Debts of the Lenders: The Price of Loyalty ( Bears Engulf Emerging Market Pt 3 )

You might hear the press toss the term "IMF conditionality" around in the next few days. What does that mean?

Simple. In any deal, lenders usually impose some sort of restrictions or parameters on the terms of the loan. Lenders impose these restrictions to increase the chances of their loans being repaid in a timely and efficient manner.

During the 1997-1998 financial crises, the IMF (a cabal of G7 nations) was able to successfully bailout emerging markets...but at a steep price. IMF aid was "conditional" on certain covenants. Social spending was slashed to the bone and public infrastructure privatized to raise the money needed to repay the loans. Rapacious Wall Street bankers and private hedge funds profited from the plundering of public treasuries. S. America, E. Europe, and E. Asia underwent political and economic turmoil. Entire governments collapsed. Riots, food shortages, and poverty spread like wildfire.

Fast forward to 2008. The emerging markets recovered on the backs of export engines: typically high commodity prices (agriculture, energy, or metals depending on the nation in question) and cheap manufactured goods. Now in the space of less than 2 weeks their recovery looks like it is about to reverse.

Leaders in emerging markets are loathe to turn to the IMF for help. They remember the chaos that engulfed their countries in the wake of similar help in the past and would rather remain loyal to their domestic constituency. Remember, most emerging markets are politically fragile to begin with.

Instead of going to the IMF, private, bilateral contracts have been struck between China, Russia, and the Gulf States (lenders with deep pockets). Unfortunately, such help does not seem enough. Besides, China, Russia, and the Arabs have their own problems.

Nor can the IMF afford to holdout for profitable deals that benefit their corporate constituency. The IMF may be forced to offer unconditional aid regardless of any existing ties of loyalty. In other words: No more one sided deals that profit their banking and private side friends. Globabilization itself is at stake.


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