Declining Use: The ESF Is Put Out to Pasture

Concerns at the Federal Reserve and within the Clinton administration regarding the fragility of the financial situation in Brazil turned out to be well founded. Later in 1998, Brazil’s currency—the real—was attacked by speculators, necessitating an IMF program. Once again, Treasury stepped in with $5 billion in loan guarantees from the ESF. However, after

Brazil, the ESF’s role in ILLR actions fell into disuse.[1] Several notable things changed at the beginning of the twenty-first century that contributed to the declining use of ESF resources for international bailouts. First, the IMF’s push for additional resources was ultimately successful as the Eleventh General Quota Review was adopted in January 1998.[2] This included the creation of the New Arrangements to Borrow (NAB). In December 1989, the Fund held just under $99 billion in total assets; in December 1999, total assets stood at $217 billion.[3] With additional resources, the problem of resource insufficiency attenuated somewhat, reducing the need for supplemental ESF credits. Barry Eichengreen and Richard Portes observed that the combination of enhanced IMF resources and domestic political opposition to bailouts in the United States meant that the ILLR role and the responsibility for managing "future Mexicos” was placed "squarely on the shoulders of the IMF.”[4] Another notable change was the election of President George W. Bush, who, like Reagan decades earlier, assumed office with a belief in the efficiency ofthe market. Bush’s Treasury Department emphasized "limiting official involvement” in foreign financial crises.[5] Under Bush’s tenure, the ESF was only used once on behalf of a foreign government—a very short-term $1.5 billion credit to Uruguay, which did not capture any headlines.[6] A final reason why Treasury got out of the business of providing credits to foreign governments is the remarkable era of financial stability that defined the 2000s. According to data collected by Luc Laeven and Fabian Valencia, debt defaults and currency crashes became increasingly rare between 2000 and 2007.[7] With few countries needing to be rescued, rescuers were no longer in high demand. And it was not just US ILLR mechanisms that were getting rusty. By 2007, outstanding loans from the IMF had declined to historically low levels. Some scholars openly wondered about the relevance of the IMF in such a stable global financial system.[8] In a world without financial crises, an ILLR no longer appeared necessary.

  • [1] While the ESF’s international use has all but vanished since 2002, the funds weretapped by Treasury during the 2008 financial crisis to guarantee investments in moneymarkets and mutual funds.
  • [2] IMF 2013.
  • [3] Boughton 2012, p. 743.
  • [4] Eichengreen and Portes 1997, p. 2.
  • [5] Roubini and Setser 2004, p. 200.
  • [6] The ESF’s foreign activities during the Bush administration are most well known fora loan that never happened in 2003 in the lead-up to the Iraq War. In an attempt to gainTurkey’s permission to use its military bases as a launch site for attacks against Iraq, Bushpromised $8.5 billion from the ESF (Entous 2003). Ultimately, Turkey refused and the loanwas never made. Nonetheless, the proposal indicates the administration viewed the purposeof the ESF somewhat differently from its predecessors.
  • [7] Laeven and Valencia 2008.
  • [8] Helleiner and Momani 2007.
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