The International Monetary Fund’s Christine Lagarde used the word “challenging” to describe the Cyprus rescue to which she pledged $1.3 billion. She might say the same about where the IMF stands with the U.S. Congress.
Lagarde, the fund’s managing director, is relying on President Barack Obama’s administration to persuade lawmakers to approve a 2010 global agreement that would double the amount the IMF has available for lending, to about $717 billion. The support of the U.S., which pushed for the package that also gives China and other emerging economies more voting power at the organization, is essential under the lender’s rules.
The U.S. would contribute its share to the fund’s expanded lending authority by shifting about $63 billion from an existing credit line. Obama requested the transfer in his 2014 budget today, timing that’s less than ideal as Congress grapples with the effects of automatic spending cuts known as sequestration. What’s more, the IMF needs new champions on Capitol Hill after the departure of two longtime supporters, Republican Senator Richard Lugar and Democratic Representative Barney Frank.
“There’s not a lot of appetite on Capitol Hill to be seen as supporting international organizations,” said Timothy Adams, a former Treasury Department undersecretary who is now managing director of the Washington-based Institute of International Finance. Now “the sequestration issue makes everything that appears to be a spending proposal all the more difficult to achieve,” and the IMF request is “an easy target to demonize.”
Over the past month, former U.S. officials including Adams and former Treasury Secretaries Henry Paulson and Lawrence Summers have written to congressional leaders urging lawmakers to pass the agreement. The measures would preserve U.S. influence at the Washington-based institution and help continue promoting U.S. objectives such as growth and financial stability, they said.
After bailing out economies from South Korea to Brazil in the late 1990s, the IMF has shifted the focus of its loans over the past three years to the debt turmoil in Europe, where it is co-funding bailouts to Portugal, Greece, Ireland and soon Cyprus. The IMF estimates that the 17-country euro region accounts for 64 percent of total credit outstanding as of March 28, up from 40 percent a year earlier.
That’s a concern for some lawmakers.
“The euro-zone monetary crisis has added a new wrinkle to these international funding mechanisms,” said John Campbell, a Republican from California who chairs the House subcommittee with oversight of the institution, in a February interview. “In the past the major economies put money in these things and a lot of it went out to some of the smaller economies around the world. Now you have at least one of those major economies under considerable stress.”
Campbell, who called a hearing on the U.S. role at the IMF this month, said the lender needs to “consider me a neutral observer at the moment.” Christopher Bognanno, a spokesman for Campbell, said yesterday the lawmaker’s position hasn’t changed.
One lawmaker who has expressed willingness to expand the IMF’s resources is California Representative Maxine Waters, who replaced Frank as senior Democrat on the Financial Services Committee.
“I look forward to working with the administration to both ensure that the IMF is well-equipped and that developing nations are given a greater voice in its operations,” she said in an e-mailed statement.
Waters was among Democrats who voted in 2009 against a spending bill that included the temporary credit line to equip the IMF to respond to the global financial crisis. She signed a letter to appropriators asking that the IMF not be given a “blank check.”
Delays are embarrassing for an administration that had spearheaded efforts to give emerging markets more voting power at the fund at the expense of Europeans, said Whitney Debevoise, a former U.S. representative on the World Bank board of directors from 2007 to 2009.
“We were the leaders for this reform and now we’re the laggards,” Debevoise said in a phone interview. With elections last year “the administration hasn’t really pushed hard,” and now “will have to find some new champions,” said Debevoise, a senior partner at Washington law firm Arnold & Porter LLP.
The delay is blocking nations such as South Korea and Brazil from getting a voting share that better reflects their rising economic weight. Failure to implement the measures first agreed to by the Group of 20 nations would also hurt the IMF, Brazil’s Finance Minister Guido Mantega said.
“Without implementation of reforms already negotiated, or the continuity of reforms in the IMF, the institution runs the risk of losing relevance and the capacity to influence the world economy, with losses for everyone,” Mantega said in a statement e-mailed to Bloomberg.
The administration failed to get the IMF measures included in legislation funding the government through September.
“The U.S. is committed to implementing the 2010” agreement, Treasury spokeswoman Holly Shulman said in an e-mailed response to questions. “We are actively working with Congress to get this completed as soon as possible.”
The agreement requires an authorization to transfer about $63 billion from the temporary credit line of about $100 billion agreed to by the U.S. in 2009. It will be up to Congress to decide whether to appropriate any funds as loan-loss reserves for the $63 billion. Four years ago, the Congressional Budget Office determined an appropriation of about $5 billion was necessary to cover the new commitments under the temporary line of credit.
Representative Cathy McMorris Rodgers, a Republican from Washington state, sought to limit U.S. participation in IMF bailouts to European Union countries. She and Jim DeMint, then a South Carolina Republican senator, introduced legislation to rescind the temporary 2009 credit line, agreed to in the midst of the global recession.
In 2011, the DeMint amendment was defeated 55-44, helped by four Republican votes including that of Lugar, who had also backed increasing IMF lending resources. Lugar, then the top Republican on the Senate Foreign Relations Committee, lost his party’s primary in Indiana to a Tea Party-backed candidate last year after 36 years in the Senate.
“Who’s going to be the new Lugar, who’s going to be the new Barney Frank?” Edwin Truman, who was a U.S. assistant Treasury secretary in the Clinton administration, said in an interview. “There’s a vacuum there.”
Republican Bob Corker of Tennessee replaced Lugar on the committee. His record on the recent IMF votes is mixed. While he voted in favor of the credit line, which was attached to a war-spending bill, he also backed the DeMint amendment.
Corker said in an e-mailed statement yesterday he “will carefully review” the request in Obama’s budget.
Meanwhile, the new chairman of the Foreign Relations Committee, New Jersey Democrat Robert Menendez, is facing a Senate Ethics Committee investigation into allegations that he received improper gifts from a Florida doctor whose office was raided by the Federal Bureau of Investigation earlier this year. Menendez’s office said in January the gifts, involving 2010 trips on a private jet, had been reimbursed.
Menendez wasn’t available to comment yesterday about the IMF issue, a spokeswoman said.
In 2009 Massachusetts Representative Frank, then the chairman of the House Financial Services Committee, faced opposition from Republicans and some Democrats over the credit line. To secure more Democratic votes, Frank, who retired this year, obtained from Treasury and the IMF a commitment that part of the proceeds from the fund’s gold sales would be used to finance aid to poor countries, Truman said.
“We will miss them,” Lagarde said of Frank and Lugar in a November interview. She said she meets with lawmakers “once a month on average, from both sides of the aisle” on Capitol Hill or in informal settings.
The delay is complicating negotiations for another round of shifts in voting rights taking place this year and weakening the U.S.’s voice during such talks, said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.
“Why should other governments do something that is perhaps controversial on a number of levels for them domestically?” he asked. “They’re just going to say, ‘Look guys, stick to your commitments. Come back when you’ve done your homework.’”