What does an organization do when business dries up? It sells assets and tries remaining afloat, waiting for better times. Some might say it should try changing its business model. But when business depends on nations being in crisis, there’s not much to do in a rather stable world. That’s the International Monetary Fund’s (IMF) predicament as it prepares to sell some of its gold holdings.
Over the coming years, the Fund plans to raise $6 billion by selling roughly 12% of what it holds. A part of it will be used to close a gap of $400 million shortfall it expects in the coming years.
The severe limitations to what the Fund can do in today’s world are well known. Its function as a lender of last resort to governments has greatly eroded. Asian governments have piled up huge amounts of foreign exchange and are well prepared for speculative currency attacks.
The Fund came into existence when states were the biggest players on the international financial scene. Not anymore. In fact, things have moved even beyond big, private banks as the current liquidity crunch shows. The latter have been overshadowed by what Nouriel Roubini calls the “shadow” financial system, where hedge funds, private equity and other non-state, non-regulated actors control the levers of finance. IMF simply was not hard-wired to function in such a world. Balance of payments crises, exchange rate misalignments and macroeconomic instability are no longer such pressing issues. Of course, these cannot be ruled out, but their scale and magnitude would be much smaller. It’s because of the tremendous changes in global financial markets that proposals for reforming IMF or restructuring it are so hard to implement.
The size of these markets is a good indicator of how small a player IMF now is. In terms of gross market value, global over-the-counter derivatives accounted for some $11,140 billion. Of this, the problematic credit default swaps accounted for a mere $721 billion in June 2007.
It’s not clear if the Fund can roll over such large amounts in case of a global crisis. These increasingly will be the stuff of crises to confront markets in the future.
Does IMF have a role to play in tackling financial crises in a changed world? Write to us at firstname.lastname@example.org