A Global Pandemic Bailout Was Coming—Until America Stopped It

In mid-April, in a normal year, American citizens rush to finish their tax returns, and the world’s financial elite gathers in Washington, D.C., for the spring meetings of the International Monetary Fund (IMF) and the World Bank. It is an unmissable diary entry for finance ministers, central bankers, and finance types from around the world. The spring meetings, unlike the World Economic Forum in Davos, Switzerland, in January, are an occasion at which policy is actually made.

This year is different. Taxes aren’t due until July, and the financial elite is grounded. As the world economy reels from a shock more sudden and dramatic than ever before, the annual gatherings of the IMF and World Bank this week have been reduced to conference calls. As French President Emmanuel Macron put it: “We have stopped half the planet to save lives. There are no precedents for that in our history.”

North America, the eurozone, China, and the East Asian manufacturing hub centered on South Korea and Japan are all in shock. But, as the latest data from the IMF and the World Bank makes clear, the impact is being felt around the globe. Sub-Saharan Africa is facing its first recession in 25 years.

In March, with the U.S. Federal Reserve in the lead, central banks scrambled to stabilize the financial markets. National governments have launched their lockdown life-support efforts. The IMF estimates that around the world $8 trillion has been committed in spending, loans, and guarantees to cushion the impact of the shock. That is a remarkable 9.5 percent of global GDP. Deficits will rise more sharply than in 2009 at the low point of the financial crisis.

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The countries that have the capacity to deliver this fiscal policy response are members of the G-20. It is already clear that many poorer countries and those with large foreign obligations cannot meet the challenge alone. The IMF, as the agency charged with handling immediate global financial problems, is on the front line. In the last few weeks, more than 100 countries—that is, more than half the members of the United Nations—have applied for help from the IMF.

The need for a global support program raises a series of tricky technocratic questions. First and foremost, does the IMF have enough resources? If it grants aid, what criteria should it apply in determining who qualifies? How does short-term aid relate to long-term development needs, the bailiwick of the World Bank? How does one ensure that financial support provided by the fund and the bank stays in the recipient country to pay for the crisis and does not end up paying off debts owed to particular national lenders or private banks and financial institutions?

But this year’s spring meetings are also a political crossroads. They are a test of the increasingly complex and fraught multipolar order. Observers wondered: Would there be a comprehensive move to relieve the financial burden on the poorest? If so, would China join a common front, or would it insist on bilateral deals with recipients of Belt and Road loans? Where would the Trump administration stand? There has been much talk about the crisis of globalization, the end of multilateralism, and a new cold war. Would the most powerful countries in the world be able to agree on a concerted program to assist the rest of the world?

The IMF and the World Bank are global institutions, but unlike the United Nations, they do not engage in the hypocrisy of pretending that all states have an equal voice. Voting rights are in proportion to shareholding, which roughly reflects the size of national economies. The key players at the fund are all members of the G-20. The largest is the United States, which with 16.5 percent of the voting rights has a veto over many key decisions. The spring meetings are twinned with a gathering of G-20 finance ministers.

The G-20 as we know it today is a product of crisis. It was set up as a club of finance ministers in the wake of the crises of the 1990s. The expansion of the club to include not just China but South Korea, Indonesia, South Africa, Turkey, and Brazil was intended to represent the emerging multipolar order. The first meeting of the G-20 as a gathering of heads of government took place in November 2008 in Washington in the aftermath of the Lehman Brothers crash.

The upgrading of the G-20 reenergized the IMF. In the early 2000s, the IMF was an institution in trouble. The fund’s aggressive interventions in the financial crises of the late 1990s were widely seen as illegitimately intruding on national sovereignty. Still today, across the world from Argentina to Indonesia, the memory of tough times under IMF programs stirs nationalist passions. But if no one borrows, the IMF’s budget shrinks. As the crisis struck in 2008, the fund was shedding staff. It was the backing of the G-20 that restored the IMF as a key agency of global crisis fighting.

At the G-20 summit in London in April 2009, British Prime Minister Gordon Brown, with strong support from the Obama administration, pushed through an increase in the fund’s budget to $1 trillion. The British talked enthusiastically about a new Bretton Woods moment. That was an exaggeration, but the IMF did gain a new lease on life. It not only added to its client list. It also began to creatively adapt the hidebound free market doctrines of the 1990s. Beginning under IMF Managing Director Dominique Strauss-Kahn in 2007, that process of policy innovation was continued under his successor, Christine Lagarde. This week, it was no longer a scandal when the director of the IMF’s Asia and Pacific department endorsed capital controls as a means of limiting the destabilizing outflow of funds from fragile emerging markets. In the days of the Washington Consensus of the 1990s, any mention of capital controls would have been anathema.

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A decade after that financial crisis, the next global challenge has arrived in the form of the coronavirus pandemic: How would the IMF and the World Bank respond? In the days building up to this week’s meetings, there was a remarkable burst of activity on the part of veterans of 2009. Brown brought together a roster of more than 100 former presidents and prime ministers to call for a joint commitment on the part of the G-20 to support the poorest countries in their fight with the virus with tens of billions of dollars in health care and debt relief.

As international lending contracts and investors flee into dollars, there is also an acute concern that poorer countries will be left short of the hard currency that they need. To address this risk, Brown teamed up with former U.S. Treasury Secretary Lawrence Summers to advocate a new issue of Special Drawing Rights (SDRs)—the IMF’s synthetic currency made up of a basket of the U.S. dollar, the euro, the renminbi, the yen, and the British pound. The SDR is not a loan from the IMF but a claim recognized by all IMF member states on each other’s holdings of reserve currencies. SDRs are limited to governments only and are booked at the IMF. By political fiat, the existing stock of SDRs—which were mainly issued in 2009, in the wake of the 2008 financial crisis—amounts to $281 billion. Brown and Summers called for an additional $1 trillion to fight the coronavirus. New issuance of SDRs was also favored by leaders of European and African nations, who joined forces in an appeal for a generous treatment of developing-country debt and an enhancement of the IMF’s lending power.

Some key parts of the agenda have been agreed this week. There will be a debt standstill for the 76 poorest countries. Furthermore, that initiative was joined by China, which has signaled its willingness to work cooperatively in a multilateral fashion. The Institute of International Finance, the lobby group of the global financial industry, has also agreed to join the standstill. The IMF has deployed new facilities for quick emergency lending and created liquidity lines to help developing-country central banks gain access to the foreign exchange they need.

But the crucial question was always how the Trump administration would react to proposals to either to expand the IMF’s own firepower or to expand the stock of SDRs. Relations between the Trump administration and the IMF have on the whole been cooperative. At the end of March, the U.S. Congress approved a renewal of the so-called New Arrangements to Borrow, a fundraising facility essential to maintaining the IMF’s firepower. But over the course of the spring meetings this week, the attitude of the Trump administration has hardened. At the same time as, to the horror of global opinion, President Donald Trump took aim at the World Health Organization (WHO), the U.S. Treasury made clear that it would not join the SDR bandwagon.

It is hardly surprising that there is little appetite in the Trump administration to make common cause with the veterans of 2009. And in fairness to Treasury Secretary Steven Mnuchin, he did not simply reject the plan. The U.S. Treasury views the proposals for SDR expansion as ill-targeted. Because SDRs are issued on a symmetrical basis in proportion to existing shareholding, 70 percent would go to G-20 members—most of which did not need them. Only 3 percent would go to those most in need. If members of the G-20 want to increase the SDRs available to poorer countries, they can start by lending them some of theirs. In making this case, Mnuchin is in line with seasoned U.S. Treasury officials like Mark Sobel. As they see it, the more important thing to do is to use as effectively and quickly as possible the resources that are already available to the fund and to target help to those most in need.

The upshot is that there has been temporary debt relief and new ways to quickly disburse funding from the IMF but no overall increase in the fund’s own resources and no increase in the SDR allocation to the poorest countries.

The situation of the low-income countries is dire, but they are small in economic terms. According to the World Bank, they owe a total of just over $150 billion in public debt. By contrast, the middle-income countries, the emerging markets in the true sense, owe almost $7.69 trillion, of which $484 billion is long-term bonds held by private investors, $2 trillion is long-term debts owed to banks, and $2.1 trillion is short-term borrowing. Little wonder that voices from Colombia, Mexico, Brazil, and Chile are asking: “Where is the deal for the middle-income countries?”

Kristalina Georgieva, the current IMF managing director, has said she regards the figure of $2.5 trillion as a “very conservative, low-end estimate” of the financing needs of the world’s 165 low-income and emerging economies. Compared with that number, the existing stock of SDRs and the IMF’s own lending power, which is somewhat less than $800 billion, are undersized.

Why then is the United States resisting the issuance of new SDRs? It is an easy technical fix. An allowance of $650 billion in SDRs could be distributed immediately to every member of the IMF under existing rules without any change in U.S. law. Unlike over WHO, there are no obvious points to be scored in the rivalry with China.

One suggestion is that the U.S. Treasury does not want to see an extra allocation of IMF resources to Iran and Venezuela, two enemies of the Trump administration. Not only would the Trump administration be worried about the relief provided to Caracas and Tehran. Even more important is the likely reaction in Congress from the ranks of the president’s own party.

Under the Obama administration, hawkish Republicans in Congress blockaded any effort at rebalancing voting rights at the IMF, to the profound embarrassment of the administration and the IMF leadership. In the midst of the current crisis, Mnuchin’s Treasury no doubt prefers to let sleeping dogs lie. An SDR allocation for Iran, with even the implicit approval of the Trump administration, would not be conducive to peace and quiet on Capitol Hill.

One might wish that, rather than shrinking from a clash, the Trump administration would take the lead on the issue. Championing an expansion in IMF resources could have been a way for the United States to regain ground lost to China over the handling of the COVID-19 crisis. But the Trump administration either lacks the vision or judges the political price too high. Treasury officials may also genuinely believe that the fund’s resources are enough. Let us hope that they are right. If, in fact, we face the worst-case scenario of a prolonged and recurring pandemic, this year’s spring meetings have left the global financial safety net looking dangerously thin.