• December 2022 (1)
  • March 2022 (1)
  • January 2022 (1)
  • November 2021 (1)
  • October 2021 (1)
  • September 2021 (2)
  • August 2021 (4)
  • July 2021 (3)
  • June 2021 (4)
  • May 2021 (5)
  • April 2021 (2)
  • March 2021 (5)

    So, how will the IMF's tradition change?

    Fatih Özatay, PhD30 March 2009 - Okunma Sayısı: 1185


    While talking about reconstruction of institutions like the IMF and the WB and redesigning the global architecture, in the G-20 meeting to be held in London it is beneficial to address two points that are less assertive will be highly important for countries like Turkey. Both points are closely related with each other: Grading systems of credit rating agencies and how the new opening of the IMF will accord with the IMF culture.

    First, let us underline some popular phenomena about the crisis. First, we did not lead to the crisis but we are paying higher costs. By 'we', I am referring to countries like Turkey. Second, this cost takes a different form; i.e. capital flows out of countries like us toward countries that led to the crisis. This is called 'flight towards quality'. Under this definition, the countries where the crisis emerged represent 'quality'!

    Third, countries that led to the crisis implement measures that they would not even imagine to take when things were normal. For instance, they inject high amounts of liquidity into the markets. On the other hand, if 'we' would have implemented or even announced that we would implement such extraordinary measures; we would encounter the risk that agencies cut down our credit grade and the global capital would not even think of visiting us. Nonetheless, we are going through a period that requires extraordinary measures. For instance, we need mechanisms that will make use of Central Bank foreign exchange reserves to substitute of decreasing foreign loan volume to a certain degree - such as a loan guarantee system that will provide guarantee for FX loans. However, we hesitate to implement such measures with the concern that our credit grade will be cut down.

    It is obvious that, this is at least a 'weird' situation. It is in no means 'fair'. It is necessary to deal with this weirdness. The meeting G-20 countries will hold in London is a platform that might be used for this purpose. Let us assume that Turkey and other countries suffering from the same problem addressed this 'weirdness' at the meeting. Then what? A couple of countries will say 'you are completely right', and some will say "you are right, but there is another thing". However, the problem will be left unsolved. What type of a concrete step can be taken? After all, credit rating agencies are independent institutions.  What will make them not to cut down our credit grade after we implement extraordinary measures?

    Here, a principle must be stick to: Medium term fiscal discipline. To summarize: "Yes, due to extraordinary measures, our budget deficit and public debt can go up for a bit 'for now'. However, we are 'now' also announcing measures that will compensate for this 'in the future'. As a result of the said measures, the public debt which will go up 'now' will tend to fall down again 'in the future', for instance in two years and again fall down back to the initial level let us say in 'four' years."

    At this point, the IMF must assume roles. IMF bureaucrats must not sneer at the extraordinary measures countries like Turkey are to take; or pretend not to sneer at but approve and then say "what if they cut down your credit grade?" I believe that it is a small possibility that credit rating agencies will cut down the credit grade of a country that implements an economic program the IMF gave the green light to. This is even a smaller possibility if such program was openly approved by big economies in G-20, for instance by the USA or the European Union.

    Two conditions must be met to fulfill all of the aforementioned tasks. First, apparently, an agreement must be signed with the IMF. Interestingly, under this perspective, a crucial benefit of the IMF agreement is observed though all counter arguments are still valid. Second, even if the agreement is signed, that agreement must not fall victim to the IMF culture.

    IMF made a new opening in the previous week. It increased the amount of loan to be extended, implemented a new type of agreement and announced that it will not stipulate as many and hard conditions as usual. However, the culture of an institution does not change overnight.

    Therefore, it is necessary to put full court pressure on the IMF so that this framework that allows extraordinary measures does not fall victim to the usual IMF culture. G-20 meeting is a platform to achieve this.


    This commentary was published in Radikal daily on 30.03.2009