lifestyle leader

George Soros makes a great point:

Institutions such as the International Monetary Fund face a novel task: to protect the periphery countries from a storm created in the developed world. Global institutions are used to dealing with governments; now they must deal with the collapse of the private sector. If they fail to do so, the periphery economies will suffer even more than those at the centre.

Soros then goes on to point out how differing perspectives about the financial crisis on both sides of the Atlantic threaten to derail any substantial progress in upgrading our international financial institutions. But he's only telling one-half of the story.

Yes it's true that the IMF needs more resources, but it also needs customers. The problem is both the stigma attached to countries that go to the IMF cap-in-hand and the strings attached to IMF loans. These are two of the mains reasons why the East Asian economies have built up very large currency reserves: applying for an IMF loan is punished by market actors that interpret such activity as a sign of weakness (not prudence), and is "punished" by the IMF in the form of disruptive policy reforms.

Recognizing this problem, the IMF has just launched a new Flexible Credit Line (FCL) that is specifically designed for "countries with very strong fundamentals, policies, and track records of policy implementation." It has considerably fewer strings attached and is aimed at being a precautionary tool, rather than a last resort. But the optics problem remains and countries are reluctant to apply.

Until yesterday, that is. Mexico is seeking $47 billion under the FCL to act as a buffer against the fallout from the financial crisis. In other words, Mexico has bravely volunteered itself to test how the market will react to the IMF providing pre-emptive financial assistance to a country that has their "strong fundamentals" stamp of approval. Has the financial crisis caused such an upheaval in the market mentality that this prudence will be rewarded? Or are serious investors unconvinced of Mexico's "fundamentals" and going to punish it just like old times?