IMF Bailouts: Austerity Is The Answer?

By Barrett Sheridan | From the magazine issue dated Nov 14, 2008

The International Monetary Fund has roared back from irrelevancy, with a central role in the fight against the global credit contagion. Only poor debtor nations have doubts, because once again, the IMF is urging budget austerity on some borrowers, even as rich nations roll out eyepopping spending plans to fight recession.

Already, Hungary and Ukraine have reluctantly tapped the fund for loans totaling $32 billion, in exchange for belt-tightening. Ukraine, with a budget deficit of 1.7 percent of GDP this year, will have to balance its books in 2009. Hungary will have to keep interest rates sky-high while it works to tame inflation.

The IMF’s demands were unpopular during the 1998 Asian financial crisis, and many emerging markets subsequently got their economic houses in order, precisely to avoid dealing with the IMF again. But as the crisis grows, even newly rich nations worry they may have to go back to the IMF, which has also learned its lesson—creating a new $100 billion fund that will give condition-free loans to nations that have sound policies, including balanced budgets. “After the Asian crisis, the IMF pretty much acknowledged that it shouldn’t be putting 150 conditions [on loan deals] and trying to micromanage economies,” says Mark Weisbrot, codirector of the Center for Economic and Policy Research in Washington, D.C. “They’ll never do what they did 10 years ago. But they can still do serious damage.”

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