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Saturday, August 27, 2011

Mexico Bailout No Model for Asia / IMF's usual approach could be disaster, analysts say

By Robert Collier, Chronicle Staff Writer

As the East Asian financial crisis worsens, with one humiliated country after another pleading with the Clinton administration and the International Monetary Fund for billion-dollar bailouts, many politicians and experts are looking to Mexico for clues to economic recovery.
The $50 billion bailout of Mexico in 1995 has been lauded as a textbook example of an international rescue done right. As proof, U.S. and IMF officials cite Mexico's recent return to high economic growth and its rapid payment of its debts to the United States.
But analysts across the political spectrum are quietly warning that the Mexican solution is precisely the wrong answer for East Asia. Although IMF bailouts of some type are necessary to prevent global financial instability, they say, the IMF's repetition of its Mexican-style strategy will only cause more megacrises that in turn require larger and larger megabailouts.
These analysts say the standard IMF recipe has two key failings:
-- Forcing austerity on penny-wise governments. Unlike Mexico, where the 1995 crisis was caused by reckless govern
ment borrowing and spending, state finances in East Asia are generally healthy, domestic savings rates are high, and most debt is held by private banks and corporations. IMF austerity policies may simply worsen existing liquidity crises, needlessly curbing governments' ability to restimulate their economies.
-- Making governments pay for private-sector mistakes. Instead of obliging the U.S. and European banks that made unwise loans, and the South Korean banks that received them, to foot the bill for cleaning up the mess, the IMF has acquiesced to international creditors' demands that the Seoul government guarantee local banks' foreign debts. Thus the public, not the speculators, must pay for the cleanup with tax increases, reduced social services and layoffs of millions of workers.
As this debate grows in intensity, U.S. taxpayers are about to be asked to contribute billions of dollars to keep the IMF -- the 182-nation organization that has monitored its members' economies and provided emergency loans for a half century -- in the bailout business.
The 1995 Mexican bailout is cited by supporters and opponents alike as an IMF prototype: Quick pain with quick financial recovery, averting a wider meltdown. Big macroeconomic benefits, but big social and political costs.

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