Will the International Monetary Fund use its extra $500bn booty wisely? The G20’s decision to treble the IMF’s war chest potentially gives it huge scope to soften the blow of the economic crisis on emerging markets. And there’s clearly a need. Much of eastern and central Europe, in particular, risks blowing up because companies and individuals have borrowed too much money in foreign currencies.
Consider a Hungarian homeowner who has taken out a Swiss franc mortgage from an Austrian bank. As a result of the collapse in the forint, that debt is now 27% higher in local currency terms than it was two years ago.
What would the Hungarian government, which has already received a $25bn IMF-led bailout, do with a pile of foreign exchange? The simple response would be to go out and buy forints – something it has already started doing. That might stop the currency falling further. But the homeowner’s debts would still be pretty unbearable.
There are really four culprits in this saga: the Hungarian homeowner who borrowed unwisely; the Austrian bank which lent foolishly; and their two governments which allowed them to operate in this way. The fair solution, therefore, would be some form of mortgage modification programme which spreads the pain among all parties. The Hungarian government might, for example, provide a subsidy so that the homeowner’s debt is cut a bit so long as the bank also takes a hit. And the Austrian government might then inject more capital into the bank so it doesn’t go under.
There would need to be lots of schemes for different problems from rolling over corporate debt to recapitalising banks. Designing and running these isn’t rocket science. But it isn’t the IMF’s natural forte. Its expertise is funnelling cash to governments, not the private sector. That’s why the US and the UK think the IMF should employ private-sector consultants to help do the job. The obvious candidates would be unemployed Western bankers. If they are feeling charitable or guilty, they might even think of it as an opportunity for voluntary service overseas. Then they could be proud to be a banker.