Matt Yglesias

9 Responses to “The IMF’s $5 Billion”

1. soullite Says:
   June 16th, 2009 at 3:20 pm

   We don’t really care who runs the IMF. Hell, the mere fact that you put Washington Concensus in scare quotes pretty much sums up how little you can be trusted on this issues.

   Like CAP and it’s ‘trust us! we’ll reform it later’ BS. You fuckers say that about everything. ‘Later’ never comes.

2. Patrick Says:
   June 16th, 2009 at 3:24 pm

   Maybe the 5 billion dollar cost is in lost interest.

3. John DE Says:
   June 16th, 2009 at 3:43 pm

   Patrick: Well, the blog Matt links to seems to be an attempt to explain the scoring. They believe there is some risk of default in the event of a worldwide economic crisis (hmmm… does that sound likely?) Of course, we can imagine that if one country defaults, others would too in this scenario.

   A lack of default history, however, does not ensure that in the future the IMF would never sustain significant financial losses that exceeded its reserves. In such a case, the IMF would pass those losses on to its creditor members, either through reduced remuneration (through the IMF’s burden-sharing mechanism for protracted arrears) or additional liquidity risk (because the IMF may not be able to meet U.S. requests to draw on its SDR-denominated assets).

   CBO estimates that the present-value risk-adjusted cost of the proposed increase in U.S. participation in the IMF is $5 billion. In forming this estimate, CBO envisioned various potential states of the world economy. In the most likely situations, the IMF would draw against only a small portion of the U.S. commitment and, CBO assumes, the likelihood of those funds being promptly repaid would be high. Thus, the cost of the U.S. commitment would be close to zero in those cases. In less likely situations where the IMF would need to loan out most or all of the new $100 billion line of credit, the odds of all funds being repaid are much lower and the cost would therefore be relatively high. CBO combined those different possibilities using standard options-pricing techniques to estimate the market value of the U.S. commitment. The $5 billion estimate captures the small chance that the IMF will experience some significant losses in the future, and an additional amount reflecting the premium that financial market participants demand for bearing losses associated with global economic deterioration.

4. Why oh why Says:
   June 16th, 2009 at 3:45 pm

   “It’s worth noting that despite the IMF’s association with “Washington Consensus” neoliberalism, for the past two years it’s been headed by by a French socialist.”

   It is not the first time a socialist has headed the IMF, and it hasn’t stopped neoliberal policies in the past. Just, there is “Washington Consensus” anymore.

5. Why oh why Says:
   June 16th, 2009 at 3:48 pm

   The first two points raised seem perfectly reasonable, but the second two don’t seem like a good idea.

   I’m curious; why? Here are those last two points:

   # Democratic Process. Currently, the IMF negotiates and obtains approval for loans from the executive branch of recipient countries, leaving little opportunity for democratic debate in recipient countries over the content and terms of IMF loans. In conference, we urge inclusion of bill language requiring the U.S. Executive Director to the IMF to ensure parliamentary approval of all IMF loans. This would help to ensure greater democratic participation and transparency, as well as a safeguard against corruption.

   # Transparency. Some of the IMF’s most important documents are considered classified, strictly confidential, or secret. Among the secret documents are: 1) “side letters” containing policy conditions that the IMF requires a recipient government to implement as a condition of loan disbursements; and 2) transcripts of meetings of the Board of Executive Directors. Draft IMF documents are not disclosed prior to approval by the Board of Executive Directors which precludes input from country constituencies. In conference, we urge inclusion of language to ensure greater transparency and public availability of documents within a reasonable time period.

6. David Says:
   June 16th, 2009 at 3:57 pm

   Matt this is exactly why you can’t be trusted on economic issues. This is a simple and important issue and one an international relations/foreign policy/guy who cares about Eastern Europe/economics blogger should have been all over a long time ago. This is the first time the CBO has estimated a risk of default to the IMF. It was big news in the Financial Times, WSJ, and Economist (I think).

7. David Says:
   June 16th, 2009 at 4:07 pm

   Building on that, you could have reported it as another piece of evidence that we are not out of the woods yet etc. I’m surprised you didn’t. In any case it is significant and not something CBO randomly did.

8. DTM Says:
   June 16th, 2009 at 4:31 pm

   It’s not totally clear to me how the CBO reached the conclusion “that the present-value risk-adjusted cost of the proposed increase in U.S. participation in the IMF is $5 billion” given that, as the CBO concedes, no countries has ever defaulted on an IMF loan.

   That is what is meant by a black swan.

9. Entre Sandmann Says:
   June 16th, 2009 at 11:51 pm

   a lender can expect to make a loss even on a risk-free investment. as Patrick said at 3:24 pm, they could just be charging a below-market interest rate. if, say, the loan is long-term and interest-free, then, given where the treasury rates are now, a 5% expected loss overall can easily be consistent with less than 1% in expected loss due to default. for comparison, corporate AAA bonds in normal times have yields a bit more than half a percent over treasuries. no black swans here.