Blair and Third-World Debt Relief

With the G-7 summit ramping up, there's been a lot of talk about third-world debt relief, with the general proposal being that the IMF (to whom much of the debt in question is owed) sell its gold deposits to finance the plan.

This sounds like a terrific idea, until you actually find out what it's doing. I read a particularly harsh piece about this in the Wall Street Journal yesterday, and until I actually did some research (most of it right at the IMF site!) I couldn't believe it was true.

See www.imf.org if you want to check this for yourself. I dare you! They don't even try to pretty it up.

Here's the plan. The IMF holds 103.4 million ounces of gold. I say "holds" because this has been deposited with the IMF by member countries, to whom it ultimately belongs. But since much of this gold was deposited a long time ago, it sits on the IMF's books at something like $52 per ounce. The IMF will raise capital for debt relief for Heavily Indebted Poor Countries (HIPCs) through a strange sellling process that will in reality leave the IMF with no more money. Here I quote from the IMF description of the process:

"Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member’s financial obligations."

Here's the process in brief. The IMF expects a payment of, say $10 million from a HIPC, but it's not coming. So the IMF sells that country $10 million in gold at today's prices. It then immediately buys back $10 million in gold (at today's prices, therefore the same tonnage of gold) from the HIPC and says, "Thanks for your $10 million payment."

Did you see where the IMF made a profit in this transaction? Nowhere! This is what's called in US investing terminology a "wash sale," something that could theoretically generate a taxable loss or a taxable gain, but where the investor's holdings never actually change. The US tax code rightly disallows using wash sales to manipulate your tax bill, just as the IMF is using the technique of "off-market" gold sales to manipulate its balance sheet.

So Blair's plan involves 1) jiggering the IMF's books in order to 2) make payments for countries that have squandered their loan proceeds, so that 3) the IMF can say that these lenders have not defaulted and therefore 4) have a "track record of reform and sound policies" entitling the HIPCs to 5) more IMF loans.

In fairness, half of the HIPC initiative is to be financed directly by IMF member countries. But since the IMF will have no surplus money to finance its half, it will have to go into more debt to pull its weight.

Debt relief sounds like a worthy cause (whether it's the best use of available resources is a question that will have to wait for another day). But effecting it through such a shady and ill-conceived plan has got to be a mistake.