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Institutional vultures

February 11, 2010

The Financial Times, on the IMF sniffing around the EU’s debt crisis:

Few doubt the IMF would jump at the chance to be part of any rescue mission, though officials are careful to say the decision is up to Greece. But the extra cash and credibility that the IMF would bring has to be weighed against the negative signal conveyed by calling it in at all.

During the past year, the IMF has come off the sidelines to take a central role in the attempt to rescue central and eastern European countries from financial crisis. It has often been steering rather than rowing – devising and monitoring the conditions that borrower governments have to meet to qualify for money without necessarily providing all that finance itself.

For the time being it looks as though Germany and France are making enough soothing noises to calm the markets without assistance. Even if they weren’t Greece’s two biggest foreign lenders, with German and French banks between them holding around one-third of Greece’s debt, both would recognise the dangers to the entire EU project of an undignified Greek exit from the Euro, never mind a default. A rescue package would have to be found.

But having the Washington-based IMF step in to clean up a European mess would be hugely damaging. That’s why both leading EU economies are so keen to given the impression of self-sufficient competence. It’s working, for the time being.

There are shades, in all this, of the still-born Asian Monetary Fund (PDF). In the midst of the East Asian currency crisis, late 1997, the Japanese government proposed establishing a regional fund that could bail out financially-stricken countries. They argued it would be better-placed to respond to regional crises than an international institution like the IMF.

Needless to say, Washington was less than thrilled by the prospect, seeing it as a major challenge to its own financial hegemony, and the idea was swiftly nixed.

The EU represents less of an obvious challenge than an upstart new pretender: it’s a long-established institution, and the Euro itself has been around for a decade. But if a credible Europe-wide rescue package can be cobbled together, independent of Washington, it’ll be a further blow to the IMF’s battered authority.

Meanwhile, the Chiang Mai Initiative – a potential forerunner to a broader Asian Monetary Fund – is up and running. And the Latin American Banco del Sur is now established. Behind the current panic lies a gradual slide in the US’ economic power in the world.

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