So in the 1980s and 1990s, the IMF took on a new role: Lending to developing countries in that were going through major economic crises. During this era, the world’s opinion of the IMF became decidedly less warm and fuzzy.
The Fund is based in Washington, and it’s largely controlled by the U.S. and Europe, which contribute a big chunk of the fund’s loan pool. What’s more, IMF loans always come with strings attached — recipients typically have to make big spending cuts, among other things.
Not surprisingly, having an institution controlled by rich countries dictate harsh terms to poor countries during times of intense crisis created a lot of tension and resentment.
So in the past decade, developing countries that didn’t want to be beholden to the IMF started saving up their own rainy-day funds, full of dollars and euros.
“What the Asian financial crisis [of the late 1990s] did was it gave emerging market economies a very strong desire to stay out of the clutches of the IMF,” Prasad said.
The total value of foreign-exchange reserves held around the world has risen from $2 trillion in 2000 to $6 trillion now, according to Prasad — and almost the entire increase has come from countries in the developing world.
But as developing countries like China, India and Brazil were stashing aside money for a rainy day, countries at the edges of Europe were heading for fiscal disaster.
And so, over the past year, the focus of the IMF has shifted back to Europe.
The IMF has been a key player in the bailouts of Greece, Ireland and Portugal. For one thing, it has contributed a significant chunk of the money. For another, the presence of the IMF has also made it politically more palatable for the recipients to agree to the terms of the bailouts.
But, in the past few weeks, a big, new problem has arisen: It’s become clear that Greece is so far in the hole that it probably won’t be able to pay off all its debt on time.
Strauss-Kahn’s arrest means Greece’s day of reckoning — and the potentially widespread fallout — may be coming sooner, rather than later.
Strauss-Kahn has been pushing for Europe and the IMF to be lenient, and to lend Greece more money, Prasad said. German leaders, on the other hand, have been resisting lending more to Greece.
What’s more, the IMF has been accused of maintaining a double standard — of being more lenient with countries in Europe than it is with countries in the developing world.