The role of IMF, US Treasury Department and the Wall Street in the financial crises of Asia, Latin America and Russia

  
 
The role of IMF, US Treasury Department and the Wall Street in the financial crises of Asia, Latin America and Russia
 
The Asian, Russian and Latin American financial crises in the 1990s revealed again the unsavoury role played by IMF, the American Treasury Department and the Wall Street. While the countries involved were primarily responsible for their misfortunes, it is a fact that IMF and the American Treasury forced and encouraged these countries to open their markets for free movement of capital when the countries did not have adequate macroeconomic fundaments for such risky exposure. This opened the door for the Wall Street bankers and brokers to bring in short term hot money to get the benefit of higher interests than in their developed home markets where the interest rates were low. The bankers encouraged the emerging countries to issue bonds in dollars and marketed them aggressively to the global investors by hyping the bond-issuing country’s economy. But at the first sign of crisis, these firms would quickly pull their money  out causing foreign exchange crisis for the countries. The hedge funds would then sweep in and make a run on the currency worsening the crisis and driving them to bankruptcy. When the country reaches a situation of default on its debt or bonds, the IMF  would lend large sums to ostensibly rescue the country in crisis but most of the money goes to repayment of debt to the Wall Street bankers and bond holders. The country is forced into IMF debt and tied to the Fund’s conditions of austerity causing misery to the common people. The greedy bankers, the reckless brokers and slimy hedge funds would not have ventured into Russia or Thailand but for the guarantee that uncle IMF could be counted on for rescue. 
 
The modus operandi of IMF, US Treasury Department and the Wall Street in the financial crises of Asia, Latin America and Russia are brought out in the book “ The Chastening: Inside the crisis that rocked the global financial system and humbled the IMF by Paul Blustein, a reporter of Washington Post. 

 
In late 1992,  IMF encouraged and supported the creation of Bangkok International Banking Facilities (BIBFs), aimed at enhancing Thailand’s lure as a banking center. The theory was that banks based in Thailand (both Thai banks and the local branches of foreign banks), spurred by the incentive of special tax breaks, would attract money from around the globe that they could either relend abroad or at home in Thailand. Most of the international hot money ended up being lent to Thai businesses and converted into baht. Since interest rates in Thailand tended to be several percentage points higher than rates in the United States or Japan, foreign lenders got higher interest rates on the money they deposited in Thai banks than they could get at home. The Thai borrowers paid lower interest rates on the dollars they borrowed than they had to pay on regular baht loans. And since the baht’s value was fixed against the dollar, neither lenders nor borrowers had to make bothersome calculations about how much they might lose on a swing in the Thai currency’s exchange rate. By 1997, these transactions totaled $56 billion, triple the 1994 level. Private capital flows into the country in 1995 were equal to 13 percent of gross domestic product. That was a much larger percentage than most other developing countries received at any time during the emerging market craze of the 1990s. When the Thai Central Bank faced shortage of foreign currency, the foreign investors pulled out their dollars adding to Thai difficulty. Then the hedge funds attacked baht causing further depreciation of the currency. Thailand reached a crisis situation due to its inability to meet foreign currency and short term debt obligations. The IMF stepped in with a large rescue loan which was used up quickly to pay the foreign lenders.
 
With IMF encouragement, Russia had loosened the rules in 1996 to allow foreigners to buy and sell freely short term Russian treasury bills called as GKOs.  American and European banks, hedge funds and brokerage firms had heavily invested in GKOs, to the tune of about $20 billion in early 1998. The chief attraction was the yield, which offered very high returns in the 20-30 percent range (on an annualized basis) during this period, and the short maturity—often three months—which made the risk seem low. Russia became one of the world’s prime destinations for international portfolio managers looking for high-yielding paper to fatten their returns. Portfolio investment in Russia surged to $45.6 billion, or roughly 10 percent of the country’s $450 billion GDP. Russia-dedicated mutual funds sprang up and found themselves deluged with foreign cash. But when Russia started facing financial difficulties, these investors who made obscenely high profits on the Russian GKOs, were imploring the IMF to mobilize a bolshoi paket—a “big package”—for Moscow. When IMF lent to Russia $4.8 billion, the money was used by the Russian central bank to pay the foreign investors exiting the country’s market.
 
In 1995 when IMF extended a large loan to rescue Mexico from the Tequila crisis, even the Germans fumed that the IMF loan to Mexico was essentially going to bail out Wall Street. American investors and brokerage firms had bought tens of billions of dollars worth short-term Mexican government bonds. The rescue money went mainly to the Wall Street bond holders. The American bond holders had dumped their Mexico bonds and switched to US treasury bills since the interest rates in the United States rose at the same time. 
 
This why the IMF loan is termed as more of a “foreign investor exit facility” than a rescue for the borrower country.
 
The Korean crisis was caused by the private sector corporations and banks who had overborrowed short term funds from Japanese, American and European banks. When IMF was negotiating the Korea loan, the US Treasury sent its officials to demand from Seoul to allow greater business opportunities for foreign brokerage firms. The Americans forced Korea to increase the ceiling on aggregate foreign ownership of publicly traded companies from 26 percent to 50 percent and the ceiling on individual foreign ownership from 7 percent to 50 percent.
 
The US and the IMF have systematically forced less developed countries to remove and relax capital control restrictions so that the Wall Street could make enormous fortunes by playing  the currencies, bonds and debt of the less mature markets. Fortunately India has resisted this and that’s why India escaped from the so-called Asian crisis. There is a limit on the purchase of bonds, stocks and treasury bills by foreign funds. 
 
Even Chile, which has a free market liberal economy had imposed restrictions in the 1990s on entry and exit of short term capital flows with a minimum lock-in period and some other conditions. But the Americans got these restrictions relaxed through the US-Chile FTA signed in 2004
 
The Americans played such games since these crises in Asia, Latin America and Russia had proved more of a stimulant than a drag on the U.S. economy. In fact, the crises had a positive overall contribution to the robust U.S. growth rate. The turmoil in emerging markets produced many gains for American firms and workers, mainly because of the favorable impact on inflation and interest rates.

The above are not the complaints of a third world leftist. These are the considered conclusions of a Washington Post staff writer, who is part of the Washington DC establishment with privileged access to documents and the principal players.