The ESF and “Bridge Loans”: Correcting for the Problem of IMF Unresponsiveness

The newly minted role that Congress created for the ESF in 1977 came just in time for the debt crisis. The Federal Reserve had essentially ruled out the prospects of opening up swap agreements with the indebted countries as they tended not to be Article VIII signatories—a red line that the central bank has historically drawn when considering opening these credit lines.[1] However, the newly resuscitated ESF was free of the central bank’s inhibitions. Consequently, it became the mechanism of choice for US ILLR actions beginning in the 1980s. Russell Munk explains that the Treasury employed the ESF when the Fund or another international financial institution (IFI) "had been called upon to help, and its management had indicated that it was coming, but it was coming at a rather deliberate speed. The house was likely to burn before the IFI arrived.”[2] Although the Fund’s responsiveness was hamstrung by its standard, two-stage approval procedure—and further constrained by concerted lending—ESF credits were not bound by such a cumbersome process.

First, unlike the IMF, ESF emergency loans came with only one string attached: that the borrower seek assistance from the IMF for its medium- to long-term financing needs.[3] This is because the Treasury has traditionally required that in cases where it makes ESF credits to foreign governments there is an "assured source of repayment.”[4] Second, unlike the IMF, there is no executive board at Treasury where multiple governments debate and vote on a request. Rather, Treasury disburses resources immediately upon the consent of the Secretary of the Treasury and the president. Consequently, emergency loans via the ESF could be deployed rapidly and bridge the time between the date a government initially approached the IMF for help and when it actually received its first dollars.[5] Thus, when the ESF was used during the debt crisis, it was essentially the financial "first responder.” It arrived quickly to the scene of the crisis to prevent the fire from spreading or getting worse. Meanwhile, the IMF now had time to hammer out a long-term loan program with the government, enter into negotiations with private creditors, and take care of any other bureaucratic business that was necessary. Throughout the 1980s, Treasury used the ESF repeatedly for such bridging operations. However, into the 1990s, the ESF’s role in supporting IMF bailouts would shift from providing loans in advance of Fund disbursements to providing loans alongside Fund credits designed to augment the size of the overall financing package.

  • [1] The exception to this is Mexico, which has maintained a standing bilateral swap linewith the Federal Reserve since 1967. Because of the Fed’s historic relationship with theBank of Mexico, on some occasions during the 1980 s and 1990 s, the Fed participated alongside the Treasury in providing emergency financing to Mexico.
  • [2] Munk 2010, p. 222. There are cases where US funds were released prior to IMF financing being agreed upon. For example, in 1982, outgoing Mexican President Jose LopezPortillo acted contrary to IMF orthodoxy by nationalizing the banking system and introducing capital controls—acts that put IMF financing in jeopardy. Disaster was averted onlybecause ESF resources were released in concert with a larger BIS bailout package, buyingtime until an IMF loan was eventually worked out (Helleiner 1994, pp. 177-178).
  • [3] On rare occasions, borrowers were allowed to seek assistance from another IFI like theWorld Bank or Inter-American Development Bank. In almost all cases, however, the IMFwas involved.
  • [4] US Senate 1984, p. 12.
  • [5] Because IMF credits are paid out in "tranches” rather than up-front all at once, insome cases Treasury used ESF credits to bridge the gap until the next tranche of moneywas released by the Fund if conditions facing the country had deteriorated since initial IMFapproval.
 
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