The focus of the international financial crisis is quickly shifting from troubled banks to troubled countries, and the bailout challenge is growing more complicated.
Pakistan's government this week said it is being drained of its hard currency reserves and warned that its efforts to fight terrorism could be at risk unless the world comes through quickly with a big bailout.
Pakistan has not yet appealed for help from the International Monetary Fund, which normally would be expected to intervene in such a situation. The IMF is juggling aid appeals from several countries, and Pakistani officials say they would prefer to get help elsewhere.
The country's financial troubles arose in part because many Pakistanis took out loans in U.S. dollars. They changed the dollars into rupees and spent them in Pakistan. But the value of the U.S. dollar has gone up, so when the time comes to change those rupees back into dollars and pay off the loans, it will cost a lot more.
An Impossible Debt Burden?
Pakistan's government has been spending its own dollar reserves, buying rupees in order to keep up demand for the currency.
"If they allow their own currency to tank, then all these other individuals, corporations are going to be broke," says Kenneth Rogoff, a former chief economist at the IMF. "Because they've borrowed in foreign currency [and] their income is in domestic currency ... if the foreign currency goes way up, it makes the debt burden impossible."
But a government cannot prop up its currency indefinitely. Pakistan is burning through its dollar reserves at about a billion dollars a month and desperately needs a financial bailout.
Husain Haqqani, Pakistan's ambassador to the U.S., this week asked "people in the world's capitals" to remember Pakistan's role in the global war on terrorism and to come now to its rescue.
"If they can give hundreds of billions of dollars in economic bailouts [in their own countries], then certainly a nation that is critical to global security also deserves international assistance in terms of being able to reshape its economy and getting back on an even keel," Haqqani said.
The situation is urgent. In Islamabad on Tuesday, German Foreign Minister Frank-Walter Steinmeier said Pakistan needs help in the next six days. Steinmeier said it should come from the International Monetary Fund, but the IMF often insists that governments cut spending as a condition for getting help. Pakistan's government on Tuesday said it could "ill afford" the IMF conditions. It has sought help instead from countries such as China and Saudi Arabia that are sitting on big cash reserves of their own.
New Competition In The Bailout Business
In other cases, oil-rich countries like Venezuela and Russia have stepped up to help countries in need. David Rothkopf of the Carnegie Endowment for International Peace says the rise of these new "donor nations" means the IMF is no longer the only place a cash-strapped country can turn.
"Since the IMF has been so insistent on tough conditions that ultimately were seen in many countries as being socially difficult," Rothkopf says, "it's appealing for people to find these other sources."
Rothkopf describes what's happening as "a rebalancing of soft power," as opposed to military power. "The power that doesn't come at the point of a gun comes at the point of a check writer's pen," Rothkopf says, "and the community of check writers is getting bigger and bigger." That means the IMF faces new competition in the bailout business.
To some extent, the IMF welcomes it. The list of countries needing billion-dollar bailouts is now so long that the IMF won't be able to help them all.
"If you just look at a country like Turkey or Brazil, both of whom are having difficulties, the kind of number one might need is a hundred billion or more," says former IMF economist Rogoff, who is now at Harvard University. "The IMF is not in a position to come in with overwhelming force. It really can't stop the panic by itself."
Rogoff says addressing the global financial crisis will take cooperative, coordinated action by individual donor countries and by international institutions like the IMF. And the countries in need may not be able to pick and choose their rescuer.
Neither China nor Saudi Arabia nor any other country has offered Pakistan the financial help it needs. Within days, Pakistan may have no alternative but to accept IMF budgetary restrictions and negotiate for an aid deal, no matter how politically unpopular that option may be at home.
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