Back to Bailouts
The International Monetary Fund and the U.S. Treasury have abandoned their short-lived policy of benign neglect and come galloping back into Latin America. Treasury Secretary Paul O'Neill, in the region this week, is no longer talking tough love. With the recent bailout of Uruguay and a deal for Brazil in the works, he's no longer practicing it either. Will they never learn?</br></br>After more than $250 billion of assistance to debtor countries in the swinging 1990s, new management at the IMF and Treasury took a new tack. No more bailouts of badly run economies! No more money to defend exchange rates! Losses would teach the virtues of due diligence and careful risk evaluation.</br></br>This was not a punitive, small-minded assessment. The judgment was that the IMF rescue operations, assisted or even developed by Treasury, had increased risk by encouraging too much borrowing. Instead of taking in risk capital by offering equity, companies in emerging markets could hold on to their equity and leverage earnings by borrowing dollars from local banks. The local banks borrowed dollars from foreign lenders but lent in local currency. This added a currency risk to the banks' default risk. When foreign lenders became nervous about the size of the borrowing country's or banks' repayment obligations, they did not renew their loans. A run soon started against local banks, currency and government debt.</br></br>This policy reached a peak in the Clinton years, when Mexico, Russia, Korea, Thailand, Indonesia, the Philippines, Brazil, Argentina, and others received massive IMF, Treasury, and multilateral loans to bail out banks and pay off foreign lenders. Often, the foreign banks renewed their loans, on more profitable terms, after the IMF put in new money.</br></br>Wall Street worshipped at the Robert Rubin-Larry Summers shrine. The bankers collected fees for renegotiating the debt. They declared these policies successful because they were repaid, even though countries like Mexico, Korea, Thailand and Indonesia suffered deep recessions and ended with larger debts.