There is never a great moment to experience an emerging markets crunch. Right now, however, the timing of the debacles in Argentina and Turkey is almost fortunate for Christine Lagarde, the managing director of the IMF.
For as investors nervously watch events in Buenos Aires or Ankara, Ms Lagarde is grappling with another dilemma in Washington, around the IMF itself. This autumn she is launching a discreet lobbying campaign to persuade the fund’s major creditors to expand its resources. And as this battle gets under way, the crisis in Argentina might unexpectedly help her pitch — even (or especially) with the administration of Donald Trump.
Investors need to watch this tussle. To understand why, consider some maths. Before the financial crisis, the fund had less than $300bn available to support troubled countries. However, after the European sovereign debt crises that arsenal rose to $1tn.
This sounds reassuringly large. This week, for example, a large New York hedge fund calculated how much foreign-held debt the six most troubled emerging market countries need to roll over in the next year. This is a good proxy for the hole that the IMF might need to plug. The estimate came to $600bn, well below the IMF’s stockpile. In the 1997 Asian financial crisis, by contrast, the potential hole was about $500bn, then twice what the IMF had in reserve. “We are reasonably well resourced [now] . . . even with the materialisation of the current threats,” Ms Lagarde told the Financial Times this week.
But there is a crucial catch — or, more accurately, two catches. About a quarter of the IMF’s arsenal is cash, or money permanently deposited by members in so-called quotas. Another quarter comes from multilateral borrowing arrangements, or credit lines, which are due to expire in 2022. The rest is bilateral borrowing agreements, and those credit lines start to expire from 2019.
This is potentially alarming, since it is a fair bet that plenty more countries will soon be asking the IMF for aid, given the looming turn in the credit cycle. Just look, by way of example, at the mess in Brazil. So Ms Lagarde wants IMF members to extend the credit lines, and, most crucially, turn some of them into permanent quotas.
That sounds sensible. But the rub is that any discussion about permanent quotas will open a Pandora’s box, since many emerging market countries argue, quite correctly, that the structure needs an overhaul. “There is an urgent case for revising quota shares in favour of dynamic emerging market countries in line with global economic realities,” Arun Jaitley, Indian finance minister, declared earlier this year. However, many European countries are reluctant to start this debate, even though they also hate the idea of contributing more.
Worse still, nobody knows what the Trump administration will do. And the US has a veto. White House rhetoric might suggest the administration is unlikely to heed Ms Lagarde’s appeal. After all, Mr Trump has recently lambasted many multilateral organisations, ranging from the World Trade Organization to the International Criminal Court. The two Treasury officials overseeing international affairs — David Malpass and Adam Lerrick — are critics of the IMF, and were furious that US taxpayer money was used to help Greece.
However, as so often in Mr Trump’s Washington, reality can diverge from rhetoric in unpredictable ways. Earlier this year the White House backed plans by the World Bank to garner $13bn worth of additional resources (partly, it seems, because Jim Yong Kim, World Bank president, charmed Ivanka Trump, the president’s daughter.) More recently, Steven Mnuchin, US Treasury secretary, quietly backed the IMF’s $50bn rescue package for Argentina, and met with no visible protest.
Maybe that reflects Ms Lagarde’s own formidable charm. Or maybe administration officials think the IMF is a useful tool to counter China’s efforts to use loans to win friends in Latin America and Africa. Or maybe it is because Mr Trump has a soft spot for Mauricio Macri, the Argentine president. And White House officials know that it is easier to persuade Congress to care about Latin America than Greece.
Either way, the lesson for emerging markets is clear: if you want a more resilient IMF, better hope for a few more “Goldilocks” jolts — events that are just big enough to be a wake-up call for Washington, but not too big to pose an existential threat. Then keep an eagle eye on Mr Trump’s twitter feed and pray that it never actually features the letters “IMF”.