Tuesday, June 19, 2012

Introducing the BMF

We've been saying it for years. If emerging markets don't get a stronger voice in international institutions like the International Monetary Fund (IMF), they may pick up their marbles and play their own game. Well, here it is: The BMF.

No, this is not a reference to Samuel L. Jackson's Pulp Fiction wallet. It's the BRICS Monetary Fund.

As reported by the Financial Times, the governments of the BRICS (Brazil, Russia, India, China, and South Africa) - who have all suffered under-representation in the governance of the IMF - announced yesterday that they will build their own financial safety net, based on the Chiang Mai Initiative. The Chiang Mai Initiative (CMI), itself is based on the IMF - basically it's a Asian version of the IMF (an Asian Monetary Fund). So this is the BRICS version of a monetary fund.... a BMF!

Now, the BMF and the CMI have a long way to go to become full-fledged international organizations. When you build a financial safety net like this, you encourage good governments to take risks by ensuring them that if the global economy is unkind, there's insurance. But you're also inviting bad-credit governments to a bailout, which can create moral hazard.

The IMF's answer to this problem has been "conditionality": in return for a loan, you need to adjust your policies. Conditionality is pretty unpopular - just ask the Greeks... or people who suffered under the East Asian Financial Crisis. It's actually that very crisis that led Asian governments to start their Asian version of the IMF - to escape IMF conditionality. Funny thing is that they worried so much about moral hazard, they ultimately decided that if a government wants to borrow a significant amount from the CMI, it must have an IMF program in place... In other words, the Asian answer to moral hazard was old-fashioned IMF conditionality! As a result, nobody has actually borrowed from the CMI.

So, we'll have to see just where this BMF goes. If there are no conditions attached to BMF loans, then you can be sure that it will be a lot more popular among developing countries than the IMF. Heck, Greece may even be knocking at the BMF door. But zero conditions? That's unlikely. The BRICS don't want to lend away their money to the worst-credit countries in the world with no strings attached.

The question is: What conditions will the BRICS attach? IMF conditionality is ostensibly based on economic factors, but a lot of research suggests that politics matters too. So, will the BRICS use the BMF for purely economic purposes or will the BMF also serve as a tool of foreign policy?

Ok - so, in sum - the BRICS are putting some money into a wallet marked with the letters BMF.

Will they just give their money away, as does Pulp Fiction's Jules Winnfield with his BMF wallet?

Or will the BMF be more like the Godfather, who provides gifts in return for a service?...

Oh yeah! You can bet that this BMF is going to be a lot of fun for me to write about!