The ESF and Supplemental Loans: Correcting for the Problem of IMF Resource Insufficiency

The Fund’s improved responsiveness in the 1990s meant that the ESF became less important as a bridging financing mechanism. On the other hand, ESF credits were valuable in that Treasury could provide them alongside an IMF loan, offering additional resources in an effort to "shock” financial markets with a large rescue package. Thus, in the 1990s, policymakers tended to use ESF credits to supplement IMF loans. Even though the Fund could provide loans in excess of borrowers’ access limits in extreme cases by using the exceptional circumstances clause, the question often remained: Will it be enough? This kind of uncertainty surrounding financial rescues in the 1990s had a lot to do with how the United States used the ESF during that decade. Indeed, in several cases where Treasury provided supplemental bailouts alongside IMF credits in the 1990s, it is clear that US economic policymakers did not feel that—on its own—the IMF package was sufficient to calm market jitters. This was especially true in the case of credits to Mexico in 1995 and Korea in 1997. In both cases, which I survey in detail in chapter 6, the United States provided ESF credits in an effort to augment the packages being provided by the Fund. Policymakers believed that larger bailouts would stand a better chance of calming markets by convincing them that a sufficient backstop had been provided. In short, by providing supplemental bailouts during the 1990s, the ESF sought to complement and improve the effectiveness of the IMF by pushing its rescue efforts closer to Bagehot’s ideal of an ILLR that lends "freely and readily.”

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