TOKYO -- The International Monetary Fund will introduce a framework to mitigate currency crises by ensuring easy access to dollars without requiring the onerous structural reforms that have marked past rescue programs.
This arrangement is intended mainly to deal with capital-account crises -- currency collapses triggered by severe capital flight. With money likely starting to return to the U.S. as the Federal Reserve pivots from monetary easing, the IMF worries that corresponding outflows from emerging economies could drag down their currencies. Collapsing currencies can give rise to financial crises as foreign-debt loads soar. The situation could be made worse, if speculators take advantage of the situation to make quick profits.
A country dealing with a capital-account crisis must intervene frequently in foreign exchange markets to prop up its currency by selling dollars. The new arrangement being developed by the IMF will help countries borrow greenbacks, mainly via short-term loans maturing in a year or less.
The IMF will evaluate potential borrowers under normal conditions, looking at such data as their current-account and fiscal balances, and let them join the framework if they are deemed sufficiently healthy. Loans will be limited based on each country's capital contribution to the fund, among other factors.
During the 1997 Asian currency crisis, the IMF provided support to Indonesia but imposed strict conditions in return, such as demanding that the government let struggling banks fail. This traumatic experience has fueled a deep-rooted antipathy toward the fund in the Association of Southeast Asian Nations, among both leaders and the public. If the IMF stuck with its old methods, crisis-stricken countries would likely have qualms about accepting its help.
The new arrangement would in most cases require nothing more than a stamp of approval from the borrowing nation's central bank, as long as the country received a clean bill of financial health in the advance review. This approach should help minimize political turmoil, the IMF's thinking goes.
The fund is expected to officially settle on the new framework at a board meeting as early as this month. It has already entered talks with ASEAN countries including Indonesia and the Philippines about signing on. The IMF does not plan to approach China, which already has abundant dollar-denominated assets in its foreign exchange reserves.
Despite the economic progress made since the 2008 global financial crisis, the fear remains that financial markets worldwide could be destabilized if other central banks, such as the European Central Bank, join the Fed in veering toward tightening. This is spurring some countries to consider joining the IMF's new framework.
Signing such an agreement could on its own spark questions about a country's financial soundness. The IMF intends to ink deals with multiple countries at once to ensure that none stand out.