IMF Tackling Global Trade Imbalances


Approaching a weekend of IMF spring meetings it is sensible to ask whether the agenda is right. The IMF will roll out a full agenda of initiatives to address global imbalances. These are important issues, but form a narrow agenda given current global vulnerabilities. In placing all its efforts in one objective, the IMF’s spring meetings are likely to miss the reforms that are even more important for the next crisis. 

The initiative at the top of the agenda at this weekend’s IMF meetings is to agree on mechanisms to guide the reining in of frighteningly large global trade imbalances. The problem in a nutshell is how to set up rules that will get large trade surplus countries (read China, Germany, and a handful of others) to appreciate their currencies or stimulate domestic demand and get large trade deficit countries (read the United States) to tackle their side of the problem. 

The absence of a mechanism to deal with global imbalances is hardly a new concern. Keynes saw it as a central challenge in putting together a post-war international monetary system. Periodically (during periods of surging imbalances) it has come back as an intense focus of global policy debate. With the Chinese-American imbalances it has again been a central concern since 2005. The IMF is nothing if not tenacious on this issue. Commendably and not deterred by past failures, it is aiming to gain traction through several strategies.   

First, agreement on a system of indicators (e.g. current account imbalances, reserve accumulation, trade flows) and benchmarks against which to monitor countries’ performance on them. Ideally, some sort of sanctions or requirement for policy action would kick in if indicators exceeded benchmarks, but this last step would be even more difficult than an agreement on the indicators and benchmarks themselves. 

Second, agreement on a definition of the optimal level of a country’s foreign exchange reserves. This would also help place the spotlight on countries that accumulate large reserves and thereby thwart market pressures to appreciate their currencies. 

Third, a new form of analyzing countries’ economies in ’spillover reports’ which would focus on how policies and developments in one country affect (especially adversely) developments in others. 

As sensible as these efforts are, they concentrate on just one issue where global reform is needed, ignoring others that also need urgent attention. In other words, focusing on global imbalances (a key culprit in the 2008 crisis) exclusively, the IMF is likely missing institutional shortcomings that could be critical for the next crisis. Given the alarming levels of sovereign debt in many countries, there is a strong case to be made for moving a sovereign debt restructuring mechanism onto the agenda.   

Commendably, the IMF’s new Fiscal Monitor zeros in on the seriousness of the sovereign debt problems throughout the world.  It spares no punches in placing dismal fiscal performances in sharp relief. It recommends, indeed entreats, larger debtors to get a move on in reducing deficits and debt. 

But the IMF (and its spring meeting agenda) stops there: governments need to adjust. We know that some governments are trying, but also that some are not trying or are simply failing. What if global markets get spooked by high debt before adjustment begins in earnest? Is global governance set up now to handle the possible need for multiple sovereign debt restructurings? Without answering the questions “What then?” the IMF warns us of a major global vulnerability, but does not take leadership in rallying support for initiatives to deal with possible crises should these vulnerabilities be triggered. 

What should the IMF be doing? It should kick start the debate on measures needed to make the global economy resilient to a spate of sovereign debt crises.  Two initiatives should be at the top of the list.  

First, establishing a global system for orderly debt restructuring. The IMF can take credit for (belatedly) pushing collective action clauses (CACs) in sovereign bond contracts first for emerging markets and, more recently, advanced countries. But CACs are a distant second-best to a global restructuring mechanism that would establish clear procedures for sovereigns to negotiate in an orderly way with their creditors on the terms for restructuring when the need for it becomes politically inevitable.    

Second, establishing and adhering to transparent limits on the size of bail-outs. Currently, there are such limits but at least for some large IMF loans to European countries, they are being blatantly ignored. Such limits would help markets price risk and insurance against default realistically. Critically, they would make a step toward resolving the credibility problem that will haunt bail-outs once Greece, Ireland and possibly Portugal restructure their debt: is exceptional access to IMF borrowing a prelude to restructuring? 

Asked about why the mechanisms for sovereign debt restructuring are not on the agenda this weekend, a top IMF official responded that there is imply no appetite among member countries. Undoubtedly true, but the possibility of the need for multiple sovereign debt restructurings even in the near future is the elephant in the global governance room. The IMF is the place to get the debate going.  

Susan Schadler is a non-resident Senior Fellow with the Atlantic Council and formerly Deputy Director of the IMF’s European Department. 

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