World Bank in Fight with IMF
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
IMF Continues to Interfere with Markets
Nicholas Brady hits at IMF for ‘playing with fire’ in allowing bond default
excerpts of an article by Edward Luce
Private capital flows to emerging markets would be put at risk by the International Monetary Fund’s decision to allow Ecuador to default on its bonds, said Nicholas Brady, former US Treasury secretary.
Mr Brady said the IMF was playing with fire in giving Ecuador permission last month to renege on its debts to western investors. By allowing Ecuador to default on its next $60m interest payment on more than $6bn worth of Brady bonds, the IMF would deter western investors from putting money into other emerging markets, he said.
The bonds, named after Mr Brady, are backed up by the collateral of US Treasury bonds and are the largest asset class of emerging market debt in the international markets. His comments, which come as the annual meetings of the IMF and World Bank start today in Washington, are likely to fuel private sector concern that the IMF has altered its policy on emerging market economies.
The IMF has suggested that it is in favour of more “burden-sharing” between private and official lenders in the event of a rescheduling of an emerging market’s debts. This is in response to criticisms that it simply bailed out private creditors under previous reschedulings.
Western bankers argue that “burden-sharing” would increase the cost of capital for emerging markets. “The IMF should not create a new policy based on the weakest link in the chain [Ecuador],” said Mr Brady.
Ecuador is the first country to default on its Brady bonds. “The IMF should not be in the business of telling a country to default on its debts to the private sector,” charged Mr Brady.
Under previous reschedulings, including Mexico in 1995 and Asia in 1997, the IMF supplied loans to enable emerging market governments to repay their private sector creditors in full.
IMF officials say they will treat each emerging market crisis on a “case-by-case” basis.
This article is excerpted from the Financial Times.
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