Hey, I’m an economics newbie but I’m interested in understanding the basics of the Internation Monetary Fund and I’m wondering if someone can shed some light on it for me. I’ve done a bunch of Googling but I’m having a hard time understanding completely.
First Question: How does the IMF get the initial money to give a loan?
-I’ve read that Countries are members of the IMF and they flip the bill to pay for the IMF’s budget. Is that how it works?
Second Question: If the IMF makes money from interest on loans it gives to countries, who gets that money?
Third Question: I’ve read that the IMF helps banks to profit. EG This article:
“If we want to see the role of IMF, we can see what the IMF did in Argentina, in Bolivia, in Russia, in East Asia, in many many countries like Pakistan and like many African countries,” said Vatikiotis(Economist). “The result of the IMF involvement was the destruction of the country. All this in benefit of the American banks”
For such an important institution it is remarkable how little anybody knows about them, me included. They seem to be like the fed in that they want to appear as boring as possible so as not to be in people’s minds too much.
But yes the member countries fund the IMF. The richer countries provide more funding and thus have a bigger say in it. The US is the largest financier and then has also a large amount of sway with other big financiers (Japan first among them) so it is de facto US run.
Somewhat ironic because China is the largest financier of the US. Without first borrowing from China the US would not be able to lend money to others through the IMF and in this way enhance its role in world affairs.
The IMF is funded by reserves deposited by its members. I recently discovered each member states get a number of votes depending on its Special Drawing Rights (SDR), which is a foreign exchange reserve originally based on gold and now on the same old tired basket of currencies (US dollar, euro, UK pound, Japanese yen). SDRs are alloted by the IMF itself, based on the financial resources each member contributes to its funds. The US is by far the biggest holder of SDR’s (17,10%), meaning it’s also the largest financial contributor to the IMF coffers. SDR’s also carry votes with them: that’s why the IMF recently turned down China’s offer to increase its contribution to the IMF’s coffers, which would have helped closing their budget deficit (insert you own joke here, no need for me to do it for you).
To answer your second question, when interests are made, they get back at the IMF. That’s as easy as that.
Third question: simple. The IMF and the ECB stepped in to avoid a debt interest payment default by the Greek government. Foreign banks (especially French) were loaded with Greek junk which was labelled as “good stuff” by rating agencies (hence giving investors an impression banks were acting “responsibly”) but with good yields (a God-send in these times of low interests). They didn’t just profit: they were saved by the IMF and the ECB.
There is a nice book detailing the history and workings of IMF, World Bank and WTO by Richard Peet. Title is “Unholy Trinity: The IMF, World Bank and WTO”
So essentially the Greeks could have gone bankrupt and that would have been it. But instead they got a loan from the IMF which was paid to the banks Greece had loans from.
Greece now has to pay the IMF back, and when they do, the US government will profit. And if the US government has Securities bought by Private Banks - the banks would again profit because they would be getting the money in the end. (Becuase the US probably got loans from the banks to loan the money to the IMF)
So if I make a money trail - there would be 2 and they would look like this:
The Greek case worked in a different way: the European Central Bank (ECB) shouldered the bulk of the operation.
ECB first “swapped” some Greek bonds held by financial institutions (mostly French and Dutch banks) for “euro-bonds”, bonds emitted by the ECB itself and guaranteed for by the German and French governments. Will the ECB get interest payment from Greece? That’s a question us with savings in euros would like to know. Then the ECB set aside an “emergency fund” amounting to a whooping 110 billions: according to a few analysts that’s a ridiculous sum, a clear indication bureaucrats in Berlin and Brussels failed to keep a cool head and panicked. From this amount Greece obtained two loans: the first one, immediately after the crisis broke out, amounts to 12 billion. The second one, much less publicized, amounts to 9 billion and was approved in September. Both these loans are obstensibly to be used to pay interests on bonds that haven’t been “swapped” by the ECB.
The IMF will provide funds over the next three years: how much is still uncertain but probably it will be over 50 billion euro. As usual there are strings attached: VAT (sales taxes for you Americans) will raise from 21% to 23% and 13th and 14th month wages for both public workers and retired persons will be eliminated. And that’s just the beginning of the story. Did I hear “Argentina”?
Despite these measures Greece’s debt is predicted to raise over the next three years, to reach 149% of the GDP in 2013.
But there’s a twist in the story: despite all these cost-cutting measures, nobody mentioned the sacred cow of military spending. Greece is the only EU country whose military budget is considered a matter of national security and as such nobody exactly knows how large it is. Most estimates put it between 5 and 10% of the GDP. Both Britain and France are around 2,5% of the GDP. Greek military is VERY powerful and is an enthusiastic buyer of military hardware from Germany, France and the US. Despite this and the usual saber rattling (mostly aimed at Turkey, a fellow NATO member), contribution to NATO operations around the world has been negligible at the best: just 75 Greek soldiers are stationed in Afghanistan.
