On June 17, 2015, Bretton Woods Committee members, John Taylor of Stanford University and Clay Lowery of Rock Creek Global Advisors joined former IMF U.S. Executive Director Meg Lundsager in testifying before the House Financial Services Subcommittee on Monetary Policy and Trade at the hearing, “The Impact of the International Monetary Fund: Financial Stability or Moral Hazard?”. Against the backdrop of the current Greek crises, participants assessed the efficacy of the Fund, weighed the significance of U.S. leadership within the institution, and revived the discussion surrounding the passage of the 2010 IMF quota reform package.
IMF quota reform legislation has languished in the U.S. Congress for the past five years despite U.S. leadership in driving the reform package approval through the IMF’s Board of Governors. Implementation of the 2010 quota reform package would reform the institution’s governance structure (both in voting shares and governing seats) to be more reflective of today’s global economy, in particular giving stronger representation and financial buy-in (quota contribution) to emerging markets. Additionally, it would reallocate money from a special account called the New Arrangements to Borrow (NAB) – bolstered in 2009 by several member countries to give the IMF more resources to deal with the financial crisis meanwhile making NAB resources larger than core quota resources – back to its quota mechanism. The U.S. would not lose its veto power, nor increase its overall financial contribution. Nevertheless, Congress has yet to ratify the reforms despite every other IMF member country having done so. (Click here to see the Committee’s previous work on quota reform).
This hearing provided an opportunity to re-examine the merits of the quota reform package within the broader debate around the impact of the IMF, especially in light of recent developments in the ongoing Greek saga. Considerable attention was paid to the IMF’s lending policies, in particular the “systemic risk exemption” that was written into its exceptional access framework – a framework previously adopted to minimize uncertainty and to ensure that a country’s debt was sustainable before the IMF would lend exceptionally large amounts. When the Greek sovereign debt crisis emerged in 2010, the IMF wrote in the “systemic risk” exemption so that it could use discretion and make loans to countries that were considered systemically important but that could not meet the criteria of the exceptional access framework. (Click here to see the Committee’s work with the IMF on the issue). The majority of the hearing centered on whether this discretionary approach actually results in greater international financial stability as intended or leads to economic moral hazard (i.e. Greece).
Taylor advocated for reforming the exceptional access framework to make it more rules-based by eliminating the systemic risk exemption. Additionally, he recommended legislation that would tie approval of the 2010 IMF quota reform package to reform of the exceptional access framework. (To read Taylor’s full testimony, click here).
Lowery also agreed that the exceptional access framework should be re-examined and reformed but urged for passage of the 2010 IMF quota reform package first. (To read Lowery’s full testimony, click here).
Lundsager supported the more discretionary approach that the systemic risk exemption affords. She also stressed the importance of passing the 2010 IMF quota reform package for the U.S. to maintain its global leadership status and influence. (To read Lundsager’s full testimony, click here).