IMF is clear victor in policy mêlée

One of the few clear victors in the policy mêlée around the G20 meeting is the International Monetary Fund, which is in the process of both acquiring a lot more money and making it easier to get it out of the door.

With Mexico's announcement, confirmed yesterday, that it would apply for a $47bn (35.5bn, £32.5bn) IMF precautionary credit line, the fund has finally overcome a decade of failure to get countries to take out IMF insurance in good times rather than simply being forced to go to it in bad.

Experts say the key issue now is how many countries follow Mexico's lead, and in particular whether countries in the middle of the spectrum, neither basket cases nor teachers' pets, are prepared to risk the stigma of going to the IMF.

The preliminary signs are that Mexico has been rewarded rather than punished for announcing its application for the IMF's new “flexible credit line”, which is available only to governments with a strong policy track record. Both the Mexican peso and local equity prices rose after the announcement was made.

Mexico has a history of being rewarded for sticking its neck out. In 2003, it was the first government to issue bonds in New York containing so-called “collective action clauses” that would have made them easier to restructure in a debt default. Such clauses might have been read by the markets as a preparation for default, but in fact Mexico did not find it harder to borrow.

Whether this experience will translate into a more general willingness to take IMF money remains to be seen. So far the countries that have gone to the fund are at the far ends of the spectrum. Mexico is at one extreme, and does not even intend to draw down on the credit line. At the other are crisis-racked governments such as Latvia and Hungary that have little alternative. Morris Goldstein, senior fellow at the Peterson Institute think-tank in Washington, says: “The real issue is all the countries in the middle. You can make the trough as big and wide as you want, but you can't force governments to drink from it.”

In Asia, a lingering stigma attaches to IMF lending as a result of the intrusive conditions it enforced during the financial crisis there a decade ago. But for some other countries, the reforms may help. Economists at Barclays Capital point out that Turkey, which has been in difficult negotiations with the fund, should find its path to an IMF deal smoothed by the easing of conditions. “Turkey would likely enjoy some sweetener from the IMF's newly found flexibility,” they said in a research note this week.

“The IMF wants to get as much business as it can, having been out of the game for a while,” said Mr Goldstein. “But countries who have had terrible experiences with the IMF, such as [during] the Asian crisis, will still do a lot to avoid going there.”