As we know, last December the International Monetary Fund – under pressure from its biggest shareholder, the United States – made a major change to the rules that govern its operations. From now on, the IMF can continue to work with countries that for one reason or another do not meet their obligations to the fund’s members (their official creditors).
For seven decades the IMF has served not only as an international lender, but also, and more importantly, as the guarantor of last resort of loans that some states issue to others. In 1956, the biggest creditor countries created the Paris Club, an informal international organization, which, along with the International Monetary Fund, is responsible for ensuring the repayment of loans and credits issued by official (sovereign) creditors. But the IMF has remained the last «line of defense». Should the recipient of a sovereign loan refuse to make payments, the IMF would end all relations with that troublemaker and that country would become a pariah in the world of international finance.
This mechanism to protect the interests of official creditors worked fairly smoothly as long as it was needed by the United States and other Western countries – the primary official creditors in the global financial market. They are still the principal lenders to developing countries today. A total of $304 billion is owed by the countries of the world to the members of the Paris Club (as of Dec. 31, 2014; excluding interest on arrears), which includes 20 states.
However, many other states entered the arena of international finance as official lenders in the late twentieth century.
First there are the exporters of raw materials. Since the end of the last century, those nations have begun to establish what are known as sovereign wealth funds, which hold foreign currency earnings from the export of oil and other natural resources. These funds are used to make investments and loans. There are many dozens of sovereign wealth funds in the world. The largest of them are the sovereign wealth funds of the UAE, Norway, Saudi Arabia, and Kuwait. By the most conservative estimates, there are currently between six and seven trillion dollars of assets in these sovereign funds.
Second is China. China has the largest gold and currency reserves, some of which are in the form of sovereign wealth funds. China’s three major sovereign wealth funds hold a total of nearly $1.2 trillion. Some of the money from these Chinese sovereign funds passes through a few of the largest banks in China, which offer international loans. The credits issued by these banks are considered to be official or sovereign loans.
China’s international lending has outpaced the rest of the world in the 21st century. Suddenly, China has become the biggest official creditor in the world, and no one seemed to notice when that threshold was crossed.
Many in the West got quite worked up when a startling article titled «China’s lending hits new heights» appeared in the Financial Times on Jan. 17, 2011. The newspaper calculated that from 2009 to 2010, China’s state-owned lenders – the China Development Bank and the Export-Import Bank of China – issued at least $110 billion in loans to various states and companies in the developing world. And this estimation includes only those loans that have been officially confirmed by the Chinese and/or the recipients of the funds. The Financial Times believes that the actual total of China’s official loans could be substantially higher. For comparison, the newspaper cited another figure: between mid-2008 and mid-2010, the World Bank provided only $100.3 billion to other countries (approximately the same clients as China).
But soon the Financial Times forgot about this bombshell. The West has nothing to gain from drawing attention to these facts – it does not want to acknowledge that it has been beaten in the international credit market. Nor does China want any unnecessary publicity that would hamper the expansion of its lending, the success of which is largely due to the fact that China provides investment and official loans on terms substantially more favorable than those offered by the IMF, the World Bank, or the members of the Paris Club. Chinese loans often accrue no interest at all. Western experts call this «credit dumping» by China.
Chinese loans are primarily intended to establish control over sources of raw materials and energy in Asian, African, and Latin American countries. Once the investment projects have ended, the loans are often repaid using shipments of oil and other natural resources. Beijing’s lending is expanding also by developing the transportation infrastructure needed to import and export goods into and out of China. This includes the broad spectrum of investment projects that are part of the New Silk Road initiative. And ultimately Chinese development banks are boosting their exports of sophisticated equipment (e.g., power-plant machinery); and export credits are widely used for this.
China has long been the major trading partner for many developing countries. For example, in 2014 China conducted $166 billion in trade with the countries of Africa. Just between 2001 and 2010, China provided African countries with $62.7 billion in loans through its Export-Import Bank. That is $12.5 billion more than the total credits the World Bank granted to those countries. A similar picture can be seen in Latin America.
The Export-Import Bank of China repored that as of early 2016 it had a portfolio of 520 billion yuan ($79 billion) in foreign loans that it had furnished as part of the One Belt, One Road mega-project. The loans are intended to finance approximately 1,000 infrastructure projects in 49 countries around the world.
One more example. During the two-day Forum on China-Africa Cooperation held in Johannesburg in December 2015, Chinese President Xi Jinping declared that Beijing plans to provide $60 billion in financial assistance to the countries of Africa. Part of that will come from zero-interest-rate loans.
Now let’s go back to where we started – to the changes in the rules at the International Monetary Fund. In most countries Washington has lost its position as the leading lender. China is taking over everywhere. For several years Uncle Sam has been looking for a way to fight the expansion of Chinese credit. The IMF’s biggest shareholder has long nursed the dream of changing the rules for the IMF’s work, legitimizing sovereign defaults, and depriving the fund of its role as a guarantor of sovereign credits. That would really put a finger in Beijing’s eye, in retaliation for squeezing the Americans out of many developing countries.
Once a precedent has been set in Ukraine (after its non-repayment of its sovereign loan from Russia), this can encourage developing countries to «stiff» their Chinese creditor. And afterward we can expect conflicts to erupt between China and developing debtor countries.
This kind of IMF «reform» is like playing with fire. Not only is the fund’s existence jeopardized, but so is the entire international financial system, which, having lost its «guarantor of last resort», could suddenly implode. America’s behavior is reminiscent of that of Herostratus who burned down the celebrated Temple of Artemis in his own city, in order to prove his «exceptionalism». For seventy years the International Monetary Fund has held the same significance for Uncle Sam as the Temple of Artemis held for the residents of Ephesus in ancient Greece.
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On Jan. 20 the IMF abolished what was known as «systemic exemption,» a principle that had been adopted in 2010 and allowed the fund to make loans to countries with unsustainable debts, if there was a genuine threat that their crisis might infect neighboring economies. This decision has made the IMF’s policy even more confusing. Experts disagree as to how the abolition of «systemic exemption» will affect the IMF’s continued cooperation with Ukraine.