The Problem of Unresponsiveness

There is a standard normative argument in favor of an ILLR mechanism. As an international financial crisis is unfolding, such a mechanism can restore market confidence in an afflicted country’s financial system (or, as was the case in 2008, the entire international financial system) by keeping lines of credit open when markets have seized on risk fears. In doing so, the ILLR can stop the crisis from spreading and/or intensifying, preventing localized disturbances from going global and serious panics from becoming catastrophic. The ability for an ILLR to act quickly matters because crises themselves typically unfold quickly.[1] Even if an ILLR has announced that a response is coming, if there is too long a delay before releasing funds, the damage may be done before a bailout is provided in the first place. As Eduardo Fernandez-Arias and Eduardo Levy-Yeyati argue, it is desirable that an ILLR provide "timely, immediate disbursements to prevent crises rather than cure their consequences or, if already underway, mitigate and resolve them at minimum cost.”[2] Based on the classic conception, ideally, an ILLR should preempt market panic by stating that it will lend freely to solvent countries at a moment’s notice. Then, in the event of a crisis, it should promptly follow through on this promise. The issue of independence is also related to the underlying issue of speed.

Dependence on the consent of additional actors slows down an ILLR’s ability to respond to a developing crisis. This is not unlike the role of "veto players” in the literature on political institutions. Veto players, simply put, are actors whose consent is necessary in order to enact a policy.[3] This introduces additional uncertainty from the perspective of markets since it may portend time-consuming negotiations between the financial gatekeepers. If markets know that a lender’s decisions depend on the consent of others, they will be more inclined to doubt the timeliness and effectiveness of an eventual response.

The process by which a member country obtains financial assistance from the IMF consists of two main stages. In the first stage, the member country approaches the Fund and expresses its interest in seeking assistance. However, before formally requesting a loan, the country must enter into discussions with IMF staff. In these discussions, the two sides negotiate the proposed loan’s terms including its size, maturity, and conditions designed to adjust the borrower country’s economic policies to "overcome the problems that led it to seek financial aid from the international community” in the first place.[4] These negotiations—which can span weeks or even months—represent the first hurdle a country must overcome before it receives the financing it needs. Upon the completion of negotiations with IMF staff, an official "Memorandum of Economic and Financial Policies” is written by Fund staff outlining the objectives and macroeconomic and structural adjustments that the borrower government has agreed to implement in exchange for the loan as described in the memo. The memo is then submitted by the staff on behalf of the borrower government, along with a dated "letter of intent” to the executive board of the IMF. The program is placed on the board’s schedule. On that date, the board votes whether to approve or reject the request. Exactly how slow is the IMF as a crisis lender in practice? Ashoka Mody and Diego Saravia find that between 1977 and 2004, an average of 17 months transpired between the onset of a crisis and the initiation of a Fund-supported program.[5] Figure 2.1 displays yearly data that isolate the second stage of the IMF lending process: the number of days that transpires between a formal loan request and approval of that request by the board.[6] The mean

Figure 2.1

IMF Loan Approval Periods, 1955-2009

loan approval period for the sample of requests is slightly more than one month (at about 37 days). As is apparent in the figure, considerable variation exists across time and requests. In some cases, borrowers were forced to wait several months before receiving assistance; in others, the executive board approved requests relatively swiftly (this is especially true in recent years). However, for most of the IMF’s history, borrowers waited several months before receiving assistance. In sum, because of the bureaucratic, multistage process through which loan requests must pass, the Fund generally falls far short of Bagehot’s ideal of a speedy LLR mechanism.

  • [1] See Bordo and James (2000), who argue that the increased depth of financial marketshas made the speed of crisis response increasingly important today.
  • [2] Fernandez-Arias and Levy-Yeyati 2010, p. 15. Emphasis added.
  • [3] Tsebelis 2002.
  • [4] Quote from the "IMF Lending Factsheet,” available at howlend.htm (accessed 9 February 2012).
  • [5] Mody and Saravia 2013, p. 192.
  • [6] More specifically, these data depict the number of days that transpired between dateslisted on every standby arrangement (SBA) and Extended Fund Facility (EFF) letter ofintent and the date on which the executive board approved that loan request. Since theIMF’s creation, the SBA has been the institution’s "workhorse” emergency lending mechanism for countries facing short-term balance of payments problems. In the mid-1970s, the
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