IMF Factsheet
January 1998

IMF Bail Outs: Truth and Fiction
IMF assistance to Korea, Indonesia, and Thailand has been criticized for "bailing out" specific groups--such as commercial banks and private investors--at the expense of other, less favored groups and taxpayers. In fact, IMF assistance has been provided in support of programs that are designed to deal with the causes and consequences of economy-wide, structural imbalances and the potential threats these imbalances pose to the international monetary system. Under the conditions of these programs, commercial banks and private investors are not being protected from financial losses, as outlined below.

Equity holders and owners of other publicly traded instruments have suffered losses. In U.S. dollar terms, as of December 17, 1997:

  • Korea's stock market had declined 67 percent since August 11;

  • Indonesia's stock market had declined 75 percent since July 30; and

  • Thailand's stock market had declined 63 percent since July 29.

    There are no provisions in IMF-supported programs for public sector guarantees, subsidies or support for nonfinancial institutions that are facing financial difficulties and may be forced into bankruptcy. When financial sectors are restructured, shareholders and, as far as possible, also creditors of insolvent institutions should bear the losses they would have sustained in the context of liquidations under bankruptcy procedures. Under the programs:

  • no liquidity support is to be given to insolvent institutions;

  • no special treatment is provided for shareholders of institutions that have lost their capital--any payments they receive will be in strict conformity with applicable laws; and

  • in cases where national authorities had granted guarantees to certain categories of depositors or creditors prior to entering into policy negotiations with the IMF, the authorities must ensure that any likely recourse to official support can be met while still achieving a sustainable fiscal position in the medium term.

  • Liquidity support may be provided to financial institutions that are undercapitalized but solvent. However, under the programs:

  • such support is conditional upon the institutions being recapitalized and undertaking incisive restructuring programs to restore them to full financial health;

  • whenever public resources are used to support the restructuring of institutions whose operations have been suspended or placed under conservatorship, previous owners should be removed (through writing down their equity) and management replaced; and

  • the potential cost of liquidity support to the public purse should be minimized through measures that (a) improve the institutions' financial health (and thereby their capacity to repay liquidity support) and (b) strengthen the economy so that creditors have much less reason to wish to unwind their exposures.

  • Steps That Have Been Taken

    KOREA

    KOREA
    Total Financing Committed: $57 billion, of which:
    $21 billionFund
    $10 billionWorld Bank
    $4 billionAsian Dev. Bank
    $22 billion (approx)Group of industrial countries1
    1As a second line of defense, a number of countries--Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States--have informed the IMF that they are prepared to make available supplemental financing in support of Korea's program with the IMF.

    INDONESIA

    INDONESIA
    Total Amount of Assistance Committed: $40 billion, of which:
    $10 billionFund
    $4.5 billionWorld Bank
    $3.5 billionAsian Dev. Bank
    $5.0 billion Indonesia [contingency reserves]
    $5.0 billionJapan
    $5.0 billionSingapore
    $1.0 billionAustralia
    $1.0 billionMalaysia
    $1.0 billionChina
    $1.0 billionHong Kong (China)
    $3.0 billionUSA

    THAILAND

    58 finance companies--16 initially and 42 subsequently (from a total of 91)--were suspended. 56 of these companies will be liquidated; the remaining two companies will be allowed to reopen in adherence with strict rehabilitation plans, subject to being recapitalized within 90 days. There will be no contribution by the Financial Institution Development Fund (FIDF) toward recapitalization. FIDF (the lender of last resort) lending rates to viable financial institutions have been raised above the highest deposit rates in the system and all liquidity support will be subject to conditionality.

    Shareholders

    Depositors

    Creditors

    All viable financial institutions are required to strengthen their capital after new strict loan classification and provisioning rules have been applied, while all unviable institutions will be subjected to central bank intervention, their management changed, and shareholders' equity written off. Once the financial system is on a sound footing, the broad guarantees offered to open institutions will be replaced with a self-financed deposit insurance scheme, with limited coverage of deposits.

    THAILAND
    Total Financing Committed: $17.2 billion, of which:
    $4.0 billionFund
    $1.5 billionWorld Bank
    $1.2 billionAsian Dev. Bank
    $4.0 billionJapan
    $1.0 billionAustralia
    $1.0 billionChina
    $1.0 billionHong Kong (China)
    $1.0 billionMalaysia
    $1.0 billionSingapore
    $1.0 billion($500 million each from Indonesia and Korea)
    $0.5 billionBrunei

    International Monetary Fund


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