ECONOMIC STING: THE IMF GRAND DECEPTION IN THE ASIAN CRISIS

ECONOMIC STING:

THE IMF GRAND DECEPTION

IN THE ASIAN FINANCIAL CRISIS





IMF's High-Interest-Rate Prescription Appeared as a GRAND DECEPTION in the Asian Crisis--It was Touted as Cure to Ailing Asian Economies, in Reality it Was Aimed at Hiding IMF's Prior Monumental Omission to Promote Hedging Against Exchange Losses on Foreign Loans of Dollar-Debt-Ridden Asian Corporations, Which Omission IMF Tried to Conceal During the Onset of Crisis Through Preventing Impending Exchange Losses the Disastrous Way: By Prescribing High Interest Rates Designed to Stabilize Exchange Rates and Avoid Exchange Losses on Unhedged Foreign Loans of Dollar-Debt-Laden Asian Companies, Thereby Saving from Corollary Bad Loans their Foreign Creditors in Advanced Nations that Rule IMF--and Never Mind the Concomitant Massacre of Asian Banks and Borrowers from High Interest Rates.





The Announced Objective

of High Interest Rates in the Asian Crisis



Highest IMF officials explained the immediate specific objective of their prescribed high interest rates in the Asian meltdown, as follows:


From then IMF First Deputy Managing Director, Stanley Fischer

(Stanley Fischer, "The IMF and the Asian Crisis," Forum Funds

Lecture at UCLA, Los Angeles on March 20, 1998):


When their governments "approached the IMF, the reserves of Thailand and Korea were perilously low, and the Indonesian Rupiah was excessively depreciated. Thus, the first order of business was...to restore confidence in the currency. To achieve this, countries have to make it more attractive to hold domestic currency, which in turn, requires increasing interest rates temporarily, even if higher interest costs complicate the situation of weak banks and corporations….


"Why not operate with lower interest rates and a greater devaluation? This is a relevant tradeoff, but there can be no question that the degree of devaluation in the Asian countries is excessive, both from the viewpoint of the individual countries, and from the viewpoint of the international system. Looking first to the individual country, companies with substantial foreign currency debts, as so many companies in these countries have, stood to suffer far more from… currency (depreciation) than from a temporary rise in domestic interest rates…. Thus on macroeconomics… monetary policy has to be kept tight to restore confidence in the currency…."





From the then IMF Managing Director Michel Camdessus himself

("Doctor Knows Best?" Asiaweek, July 17, 1998, p. 46):



"To reverse (currency depreciation), countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this (hurts) weak banks and corporations."





The Discernible Real Objective

of High Interest Rates in the Crisis



From the foregoing pronouncements of the two highest IMF management officials, Messrs. Michel Camdessus and Stanley Fischer, it appears that IMF simply FOOLED and deceived crisis-hit Asian governments, central banks, banks, and borrowers on the real reason for the IMF-prescribed high interest rates. The true objective was to save not the ailing Asian economies but the dollar-debt-ridden Asian corporations' foreign creditors—banks and non-banks—in advanced nations that rule IMF.



Clearly, IMF knew beforehand that high interest rates would ravage Asian banks and borrowers, but they had to be sacrificed for the greater goal of stabilizing exchange rates, curbing currency depreciation, and saving from huge exchange losses the dollar-debt-ridden Asian companies, otherwise it would be their foreign creditors in advanced nations that would bear the brunt of concomitant bad loans from the Asian corporations’ loan defaults and bankruptcies, the foreseeable result of their impending staggering exchange losses on their unhedged foreign loans. By all means, IMF had to prevent the Asian epidemic from going out of bounds and reaching the advanced nations' shores no matter what the cost might be—not to the advanced nations but to the distressed Asian economies.





IMF COMMITTED ERROR AFTER ERROR

BEFORE AND DURING THE ASIAN FINANCIAL CRISIS



Before the Crisis,

IMF Should Have Prescribed

Exchange Rate Hedging on Foreign Loans

of Dollar-Debt-Laden Asian Corporations,

to Avoid The Need for High Interest Rates in Addressing

Impending Exchange Losses on their Unhedged

Foreign Loans Once Economic Crisis Strikes



Actually, IMF could have totally or substantially avoided prescribing ultra high interest rates in the Asian meltdown had it been proactive rather than reactive in the attainment of its mission. As a prime mover of currency liberalization under globalization, IMF helped promote the free flow of advanced nations' massive investment funds to developing Asian countries. The foreign fund inflow fueled the phenomenal growth of affected Asian economies before the crisis. However, as the funds were in effect direct and indirect lending to the developing nations, in the long run, there was probability that future collections maybe marred by delinquencies and bad loans, especially if there were economic aberrations. Therefore, as part of IMF's planning and risk management, it should have instituted safety nets to currency liberalization, like exchange rate HEDGING on foreign loans obtained by dollar-debt-ridden Asian corporations.



When IMF did nothing and the Asian crisis erupted, naturally, it had to face an onrushing TSUNAMI of EXCHANGE LOSSES among dollar-debt ridden Asian companies—which losses could translate to bad loans in the origins of the massive investment funds that flowed into the region—the advanced nations that control IMF. To address the problem, IMF sacrificed Asian borrowers and banks through subsidy-laden, anti-market, disastrous but superfluous—in other words, technically wrong—high interest rates, culminating in humongous bad loans in victimized Asian economies.





Can’t IMF See that it is Absurd to Have Wrong Parties—

Borrowers—Sacrifice to the Extent of their Bankruptcy

for Dollar-Debt-Ridden Asian Companies that they Do Not Own

in the First Place—From Which they Never Profited in the Past,

and from Which they Will Never Profit in the Future?



In the past, when the going was great, DOLLAR-DEBT-RIDDEN ASIAN CORPORATIONS benefited from their FOREIGN LOANS which helped them generate PROFITS solely for their STOCKHOLDERS, who received the profits through cash and stock dividends. Then, when the Asian crisis struck and the going was tough, under free market the Asian corporations should suffer the consequences of their negligent act—RISK MISMANAGEMENT through failure to obtain exchange rate HEDGING on their foreign loans. However, this was not the case under IMF's violation of free market by way of its prescribed out-of-the-market HIGH INTEREST RATES, charged by banks on a no-choice basis to victimized captive old-loan borrowers. Through high interest rates as monetary tool against currency speculation, consequent currency depreciation, and corollary exchange losses, IMF in effect shifted the burden of saving these corporations from the right parties, their owners or stockholders, to the wrong ones—the Asian BORROWERS.



To begin with, the borrowers were totally unrelated to the corporations and NEVER BENEFITED from their FOREIGN LOANS and PAST PROFITS. Worse, borrowers had to save the corporations at the price of disasters to the borrowers themselves. Afterwards, when the crisis is gone, the dollar-debt-ridden corporations saved by borrowers will generate profits again—but none of their profits will ever be used to help the now bankrupt borrowers who saved them in the past. In short, in gross violation of sound economics, morals, fair play, logic, the governing generally accepted standard of fairness—the BENEFIT PRINCIPLE of public finance—and of course sacred FREE MARKET, IMF played God over the lives of unsuspecting Asians, by heaping all sacrifices upon discriminated borrowers and all profits upon favored dollar-debt-ridden-corporations.





During the Crisis,

Even With the General Lack of Foreign Loan Hedging by

Dollar-Debt-Ridden Asian Corporations, IMF Could Have Avoided Still

the Need for High Interest Rates—Through Less Disastrous Alternatives



During normal times, IMF should have prescribed HEDGING on foreign loans to developing countries under its sway in order to avoid the supposed need for high interest rates once unpredictable economic crisis suddenly strikes. High interest rates are supposedly needed to defend the local currency against speculative attacks, stabilize the exchange rate, curb currency depreciation, avoid huge exchange losses of dollar-debt-ridden corporate-borrowers, and prevent staggering bad loans of foreign creditors.



If so, even if IMF failed miserably before the Asian meltdown to prescribe exchange rate HEDGING on foreign loans of Asian corporations, it could have AVOIDED STILL the need for high interest rates during the crisis had it been imaginative enough to think of the less disastrous currency SPECULATION control, already provided in long standing Bangko Sentral ng Pilipinas (BSP) central bank regulations and amended under its BSP CIRCULAR No. 138 dated July 31, 1997, or shortly after the advent of the regional crisis, yet undiscerned and unimplemented by BSP during the entire duration of the crisis in 1997-1998.



Indeed, in response to the baffling global problem of currency speculation, interest rates were drastically raised during the Asian flu simply because IMF officials and "central bankers from around the globe have found no immediate solution to…currency speculators." ("Central bankers share gripes on speculation," Philippine Daily Inquirer, January 13, 1999, p. B5). IMF and central bank officials could not see, or think of on their own, the integrated currency SPECULATION control—the then available but unimplemented high-interest-rate alternative mandated right in old Philippine central bank circulars. They fought dollar speculation through high interest rates, when all they had to do was punish banks selling dollars to speculators—in the Philippines a violation of the cited BSP CIRCULAR No. 138 which disallowed sales of dollars for hoarding purposes, or those without proof of foreign obligations. Had they done so, they could have neutralized currency speculation even without high interest rates, as was successfully done in the Philippines in August 2001 and March 2003, when BSP finally but belatedly saw the light (pp. 123-124, 188-190 of the book Puzzlers: Economic Sting).







MARCELO L. TECSON