Role of the IMF, the US Treasury and Wall Street in the financial crises of the 1990s

The Asian, Russian and Latin American financial crises of the 1990s again exposed the unsavory role played by the IMF, the US Treasury Department and Wall Street.

While the countries concerned were primarily responsible for their misfortunes, it is a fact that the IMF and the US Treasury forced and encouraged these countries to open their markets to the free movement of capital when the countries did not have macroeconomic fundamentals adequate for such risky exposure. This opened the door for bankers and brokers on Wall Street to bring in short-term speculative money to benefit from higher interest than in their developed home markets where interest rates were low. Bankers encouraged emerging countries to issue bonds in dollars and marketed them aggressively to global investors by promoting the economy of the bond-issuing country.

But at the first sign of a crisis, these companies would quickly withdraw their money, causing a currency crisis for countries. Hedge funds would then step in and run on the currency, deepening the crisis and driving them out of business. When the country reaches a situation of default on its debt or bonds, the IMF would lend large sums to ostensibly save the country in crisis, but most of the money goes to paying off the debt of bankers and holders. Wall Street bonds. The country is forced into debt with the IMF and tied to the Fund’s austerity conditions that cause misery for ordinary people. Greedy bankers, reckless brokers and slimy hedge funds would not have ventured into Russia or Thailand without the assurance that Uncle IMF could be counted on for rescue.

The modus operandi of the IMF, the US Treasury Department and Wall Street in the financial crises of Asia, Latin America and Russia are highlighted in the book Punishment: Inside the crisis that rocked the global financial system and humiliated the IMF by Paul Blustein, reporter for the Washington Post.

In late 1992, the IMF encouraged and supported the establishment of Bangkok International Banking Facilities (BIBF), aimed at enhancing Thailand’s attractiveness as a banking center. The theory was that Thailand-based banks (both Thai banks and local branches of foreign banks), boosted by the incentive of special tax breaks, would attract money from around the world which they could lend to abroad or at home in Thailand. Most of the international speculative money ended up being lent to Thai companies and converted into baht. Since interest rates in Thailand tended to be several percentage points higher than those in the United States or Japan, foreign lenders got higher interest rates on the money they deposited in Thai banks they couldn’t get at home.

Thai borrowers paid lower interest rates on the dollars they borrowed than they had to pay on ordinary baht loans. And because the value of the baht was fixed against the dollar, neither lenders nor borrowers had to do tedious calculations about how much they could lose if the Thai currency’s exchange rate fluctuated. In 1997, these transactions totaled $56 billion, three times the 1994 level. Private capital flows into the country in 1995 were equal to 13% of gross domestic product. This was a much higher percentage than most other developing countries received at any time during the emerging market craze of the 1990s. When the Central Bank of Thailand faced a shortage of foreign currency, foreign investors withdrew their dollars, adding to Thai difficulties. Then, hedge funds attacked the baht, causing the currency to depreciate further. Thailand has reached a crisis situation due to its inability to meet its foreign currency and short-term obligations. The IMF stepped in with a large bailout loan that was quickly used to pay foreign lenders.

With encouragement from the IMF, Russia relaxed rules in 1996 to allow foreigners to freely buy and sell short-term Russian treasury bills called GKOs. American and European banks, hedge funds and brokerage firms had invested heavily in GKOs, to the tune of around $20 billion by early 1998. The main attraction was the yield, which offered very high yields from l 20 to 30% on an annualized basis) during this period, and the short maturity – often three months – which made the risk seem low. Russia has become one of the world’s top destinations for international portfolio managers looking for high yield paper to boost their returns. Portfolio investment in Russia jumped to $45.6 billion, or about 10% of the country’s GDP of $450 billion. Mutual funds dedicated to Russia have sprung up and found themselves flooded with foreign cash. But when Russia began to face financial difficulties, these investors who were making obscene profits on Russian GKOs implored the IMF to mobilize a Bolshoi package – a “big package” – for Moscow. When the IMF lent Russia $4.8 billion, the money was used by Russia’s central bank to pay foreign investors leaving the country’s market.

In 1995, when the IMF provided a large loan to save Mexico from the tequila crisis, even the Germans fumed that the IMF loan to Mexico would essentially bail out Wall Street. American investors and brokerage firms had bought tens of billions of dollars worth of short-term Mexican government bonds. The bailout money went mostly to Wall Street bondholders. US bondholders had dumped their Mexican bonds and switched to US Treasuries as US interest rates had risen at the same time.

This is why the IMF loan is described more as an “exit facility for foreign investors” than as a rescue for the borrowing country.

The Korean crisis was caused by private sector companies and banks that had over-borrowed short-term funds from Japanese, US and European banks. When the IMF was negotiating the Korean loan, the US Treasury sent its officials to ask Seoul to provide greater business opportunities for foreign brokerage firms. The Americans forced Korea to raise the cap on aggregate foreign ownership of listed companies from 26% to 50% and the cap on individual foreign ownership from 7% to 50%.

The United States and the IMF have systematically forced less developed countries to remove and relax capital control restrictions so that Wall Street can make huge fortunes playing currencies, bonds and debt in less mature markets. . Fortunately, India resisted this and that is why India escaped 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 liberal market economy, imposed in the 1990s restrictions on the entry and exit of short-term capital flows with a minimum blocking period and a few other conditions. But the Americans relaxed these restrictions thanks to the United States-Chile FTA signed in 2004.

Americans played such games since these crises in Asia, Latin America and Russia had proved to be more of a stimulus than a brake on the American economy. In fact, the crises had a positive overall contribution to the robust US growth rate. The turmoil in emerging markets has produced many gains for American businesses and workers, primarily due to the favorable impact on inflation and interest rates.

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

The author is an expert in Latin American affairs