Friday, June 18, 2010

Parsing the IMF PIGS Package

. Friday, June 18, 2010

Mark Copelovitch writes about Spain and the IMF, and how his own research sheds some light on these issues, in a guest post at Menzie Chinn's place:

As the Fund's largest quota contributors, the "G-5" countries (the US, Germany, Japan, UK, and France) exercise de facto control over IMF lending decisions. At the same time, the G-5 countries are also home to the largest private creditors in global markets, including the world's largest commercial banks. Consequently, G-5 bank exposure heavily influences these governments' preferences over IMF lending policies. In particular, I find that IMF loan size and conditionality vary widely based on the intensity and heterogeneity of G-5 governments' domestic financial ties to a particular borrower country. When private lenders throughout the G-5 countries are highly exposed to a borrower country, G-5 governments collectively have intense preferences and are more likely to approve larger IMF loans with relatively limited conditionality. In contrast, when G-5 private creditors' exposure to a country is smaller or more unevenly distributed, G-5 governments' interests are weaker and less cohesive, and the Fund approves smaller loans with more extensive conditionality. ...

So, what are the implications for a future EU/IMF bailout of Spain (or Portugal, or Ireland)? Despite the heated rhetoric by Angela Merkel, Nicolas Sarkozy, and others about the need for the PIGS to put their own house in order by imposing staunch austerity measures, we are quite likely to see even stronger support for Spain (and Ireland), given its importance for the profitability and solvency of French and German banks. Portugal, in contrast, is likely to fare worse than Greece, given its limited importance for the major eurozone (and G-5) banking sectors. At the same time, we are also likely to see tensions within the IMF over the size and terms of any contribution to future PIGS rescue packages, given that American and Japanese views about the importance of eurozone bailouts are colored by their own, less extensive, financial interests in these countries. Ultimately, whether the "core" countries in the EU and the IMF view a rescue package as a "bailout" or a worthy endeavor depends not only on whether the borrower in question has been "profligate," but also on their own domestic financial interests and the vulnerability of their own commercial banks to a potential financial crisis.

We've covered similar themes for quite some time on this blog (see, e.g., here), and the way in which domestic political constraints influence the actions of international institutions has been a major theme in IPE for quite some time. It's good to see it get more play in bigger outlets. It's too bad to see Tyler Cowen refer to it as "public choice" rather than IPE, but hopefully this sort of analysis will catch on with bigger blogs and other media outlets, and the profile of the discipline will be raised a bit.

Copelovitch's soon-to-be-released book expands on these themes, and certainly appears to be worthwhile reading.


Parsing the IMF PIGS Package
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