There is no global lender of last resort to help Mexico and Brazil withstand the global financial crisis

Yesterday’s events on the multilateral fire-fighting front of the global crisis are revealing: there is no global lending of last resort arrangement in place to help prequalified, well-behaved emerging markets such as Mexico and Brazil to withstand the first truly global financial crisis. The FED and the IMF have revealed what their balance sheet and governance constraints allow them to put on the table: an approximate, combined US$60 billion for each. This is not going to be sufficient, if one of these economies ends up in serious trouble, as the scale of government interventions in advanced economies shows.

There is a need for a multilateral swap arrangement capable of transferring quickly and effectively FX liquidity from EMs in surplus to well-behaved EMs in actual or potential deficit, e.g., a mechanism to transfer FX liquidity within the BRICs. In the 1970s, the IMF arranged such transfers from oil-exporting countries to other developing countries starving for foreign financing. In the 1990s, the FED came to the rescue of the like of Mexico and South Korea. But its balance sheet is now approaching its limits, while congress would have a very hard time to authorize hundreds of billion of dollars in support of foreign countries. The IMF is constrained not only by the limited size of its balance sheet, but also by its outdated and ineffective governance framework.

China is willing to help, as the deal with Russia indicates, but is imposing its own, peculiar (to say the least), energy-obsessed conditionality standards: not really what Walter Bagehot had in mind!

Perhaps the BIS is the place to look next to set up a realistic and effective global LOR framework for prequalified, well-behaved EMs. The BIS is a multilateral institution already managing part of emerging Asia official reserves, and where China and other systemic important EMs deal with each other productively and sensibly, within a less constraining governance framework.

7 Responses to "There is no global lender of last resort to help Mexico and Brazil withstand the global financial crisis"

  1. Guest   October 30, 2008 at 7:01 pm

    The fact that China imposses its own conditionality to Russia do not have to be a matter of surprise. Or did not US impose its own “pecualiar conditionality” to Mexican 1994 and Korea 1997 rescues?Quite naive or US inward looking idea.

    • Guest   November 1, 2008 at 9:31 am

      Yes, but the conditions (neoliberal reforms) imposed by the US on Mexico were accepted (and still are) by many well intentioned and smart economists and policymakers (even though an equal amount of the same type of people did not and still do not support such policies/conditions). Why will the Russians use the loan from the Chinese in a way that will reform the Russian economy so that a large # of Russians will benefit as well as the global economy? There are many indications that Russian policymakers will not use the money wisely.

  2. Anonymous   October 30, 2008 at 8:30 pm

    I would add to the previous reasonable comment that the author simply pretends to ignore that the BIS is also controlled by the developed countries, our current debtors. Also, Brazil seems now to be ok with the measures that have been taken, there is no need for more money, thanks. Last but not least, the use of the expression “well-behaved EMs” denounces the political inclination of the author. Well behaved? Who defines what is good behaviour? The US? Europe? The geniuses from rating agencies or Wall Street? Hahaha, the world has changed, the political balance is changed, the US and Europe should understand that quickly or they will lose ground even faster.

  3. Lupita   October 30, 2008 at 8:32 pm

    “Well behaved”? I did not expect such a patronizing term used on this site. I thought I would read a serious analysis couched in adult terms, maybe even financial ones.

  4. sergio   October 31, 2008 at 8:07 am

    Well behaved …I would optimistacally say that is an ironic expression,, is it not?

  5. Jabo   October 31, 2008 at 8:46 am

    The “Washington consensus” was buried by consensus in DC by Keynes’ visible hand!

  6. Anonymous   October 31, 2008 at 1:43 pm

    Perhaps the author would like to characterize the behavior of the central economies ?