Latin American economists urge IMF to create fund to backstop emerging market debt

Warning of increased risk associated with fragility and record sovereign debt levels, a group of top Latin American economists on Wednesday urged the International Monetary Fund to adopt immediate, central-bank-like reforms to brace for the next emerging market crisis. The Latin American Committee on Macroeconomic and Financial Issues (CLAAF), which includes top economists and former finance ministers, called on the IMF to create a $300 billion Emerging Markets Fund that could make temporary purchases of sovereign debt of selected countries with strong fundamentals.

Warning of increased risk associated with fragility and record sovereign debt levels, a group of top Latin American economists on Wednesday urged the International Monetary Fund to adopt immediate, central-bank-like reforms to brace for the next emerging market crisis.

The Latin American Committee on Macroeconomic and Financial Issues (CLAAF), which includes top economists and former finance ministers, called on the IMF to create a $300 billion Emerging Markets Fund that could make temporary purchases of sovereign debt of selected countries with strong fundamentals. The group said the IMF currently lacks the tools, financing and flexibility to address a financial contagion, which could spill over to healthy countries in an unsettled global economy.

“Emerging markets were pummeled during and after the pandemic. While we’re through the worst of it for the moment, the lesson of the pandemic is that the IMF needs more firepower to be prepared for the next crisis or global shock,” said Liliana Rojas-Suarez, who chairs the group and heads the Latin America Initiative at the Center for Global Development. The proposal comes amid heightened tensions between the IMF and Argentina, which is seeking to restructure its $44 billion IMF program in the face of nearly 109% inflation and dwindling dollar reserves. Economists have also warned of risk given record sovereign debt levels in other emerging market economies.

CLAAF said the new fund should be managed by the IMF, but have its own balance sheet, capitalized with $300 billion, which amounts to about 20% of the total outstanding sovereign international debt from emerging markets. It said the capital could be backed by swap lines from major central banks in wealthy countries. The fund should intervene only in situations when the probability of a systemic sudden stop of capital inflows to emerging markets is very high, the group said, adding it would help the IMF provide liquidity quickly if needed in a crisis.

“Too often the IMF’s hands are tied in the face of a financial crisis. This new fund would allow it to perform the functions of an international lender of last resort and quickly provide the liquidity emerging markets need," Rojas-Suarez said. In cases such as Argentina, where a country has repeatedly missed reform targets, IMF programs should be refinanced with an interest rate surcharge, but without mandating a new program of economic reforms and issuing a series of waivers, CLAAF said.

They also called for changes to the Group of 20's Common Framework for debt treatments to allow differentiated treatment of different classes of debt, and exclude domestic debt.