Spring meetings of the International Monetary Fund’s board of governors are usually unmomentous affairs.
The big IMF annual meeting draws the world financial elite every fall to eat quality hors d’ oeuvres and fret expensively about the dire times ahead. The spring follow-up is generally dry and administrative with a lot of unfathomable rhetoric about contribution quotas.
Not so this year. At the spring confab this past weekend, IMF director Christine Lagarde, that telegenic six-foot French lady you may have noticed from time to time, pulled off a financial-diplomatic coup by squeezing $430 billion more in emergency funds out of the 100-plus countries that are members of the organization.
But the real news was who gave the money – the four BRIC countries and probably some other emerging markets – and who is likely to use it: sputtering, debt-logged European nations.
This amounts to an historical turnabout that investors, particularly U.S. investors isolated by their two vast oceans, do not quite get yet: The big emerging market states are the ones on solid economic and, with some caveats, political grounds, at the moment.
The developed world is staring into the abyss with bond investors eyeing the exits and national leaders falling like dominoes. Two more European governments shook over the past two days as Netherlands Prime Minister Mark Rutte resigned with his whole cabinet, and French president Nicolas Sarkozy seemed headed to defeat based on first-round election results.
The IMF was founded after World War II, originally to stabilize currency exchange rates with market interventions. Its mandate greatly expanded during the Latin debt crisis of the 1980s. The Fund became lender of last resort to bankrupt and near-bankrupt developing countries.
As a funding pre-condition it aggressively pushed them toward the “Washington consensus,” a menu of fiscal austerity and so-called structural reforms designed by the rich Western world ostensibly for the benefit of its errant emerging brothers. President Hosni Mubarak of Egypt got off one of his few good comic lines when he dubbed the IMF the “International Misery Fund.”
Yet the IMF medicine worked eventually, by and large. Long-time shaky creditors like Brazil, Russia and Turkey slashed expenditures and built budgetary and currency surpluses. China and India pared their massive bureaucracies (structural reform) and unleashed vertiginous growth. Currencies prone to adding zeroes in the past now have to be checked because of their market strength.
The rich countries who prescribed these tough remedies neglected to treat themselves however.
Fast forward to 2012. Broad swathes of Europe are eyeing international financial hand-outs. Former supplicants from the emerging markets have cash to put into the kitty. The donor list for that $430 billion Lagarde just raised is formally a secret.
But some elementary arithmetic indicates a big contribution from the developing world. European states themselves put up a reported $200 billion, Japan $60 billion more. The U.S. demurred, officially on the grounds that Europe can dig its own way out of its debt crisis.
That leaves a hefty $170 billion unaccounted for. Most of it likely came from the BRIC nations, who are not specifying any numbers but are vocally grumbling about taking a few of Europe’s eight existing seats on the IMF’s 24-member board of directors. Indian Finance Minister Pranab Mukherjee said he “presumed” his country, China, Russia and Brazil “will contribute to increase the fund on fulfillment of certain conditions.”
What all this means for investors is that one big element of presumed emerging markets risk – the so-called sovereign risk that bonds will default, currencies blow up, and governments collapse without much warning – is increasingly a thing of the past.
The big developing countries proved more resilient on these macro indicators (currency possibly excepted) than the developed world after the 2008 crisis, and investors were rewarded by tremendous gains in their securities in 2009-10.
A second form of peril, the “governance risk” that derives from lower-quality regulation, more corruption and less transparency in emerging markets is alive and well. A case in point is today’s crash in the shares of Wal-Mart de Mexico (WMMVF, quote), the local subsidiary of the American retailing colossus, after a New York Times expose on the chain’s entrenched pattern of bribing Mexican officials – and U.S. executives’ pattern of covering it up. But that is another story.