According to Dominique Strauss-Kahn, the agency’s head, “the initial effort made by public financial entities must be significant.”

Denied the right to intervene by the World Bank and the IMF, the West African Economic and Monetary Union countries (UEMOA) had to resign themselves to watching a quarter of their banks go bankrupt. Facing the risks associated with Western banks today, the IMF now encourages State intervention.

By Amadou Fall, Dakar

Many American banks and insurance companies have reached the bottom of the financial abyss in which they have been struggling for a year now. With estimated losses in the hundreds of billions of dollars, most of them are pretty much in a state of borderline bankruptcy. Their European counterparts have indirectly been pulled into the tumult as the developed world’s stocks deviate and stabilise on and off.

Their greatest hope lies in the Paulson plan which has been defended by George Bush and both presidential candidates, John McCain and Barack Obama. Passed by the American congress, it will cost American taxpayers between 700 billion and 1.4 trillion undertaking an extensive nationalisation process.

Did someone say nationalisation? This, in theory, is the ultimate of heresies in a free market economy. But those in government and financial heavyweights of the industrialised world know that, for a long time now, the “let the market run itself” approach has its limits and that the State ought to intervene whenever crises should arise. America’s elite built their faith on this principle since the 1930s. They remain totally convinced that if the 1929 crisis had become catastrophic and led capitalism to the edge of the abyss, it is because the Federal Reserve and government officials had allowed banks to collapse by refusing to inject necessary liquidities to build confidence and promote stable economic growth.

The watchdog of financial orthodox practices around the world, the IMF has been reassuring current American financial decision makers in the soundness of their decision to intervene. Therefore, according to Dominique Strauss-Kahn, the agency’s head, “the initial effort made by public financial entities must be significant. But, if that is not the case, considerable budget efforts will be necessary to guarantee the long term stability of public finance.”

Recession

Twenty-five years ago, in the 80s, the banks of the UEMOA were in a financial crisis similar to what the United States is facing today. Around thirty of them were either delinquent or bankrupt. The causes were strikingly similar. The global economy was in turmoil, crushed by two crises in the oil industry. The Union’s member countries were not only facing a recession at that time but also a decade-long drought as well as a global plummet in the price of their primary exports (coffee, cocoa, peanuts, cotton and so on). These factors highlighted the internal fragility of the sub-regional banking system. It was suffering from evident deterioration in the quality of its assets due to lax and deficient management which lead to the ill thought-through creation of unhealthy loans.

The States of the Union, placed under structural adjustment by the World Bank and the IMF, found themselves with no recourse to public funds to save banks facing bankruptcy or to their capital in which, incidentally, they were already present.  But, unlike what appears to be the order of the day today, the States of the Union, placed under structural adjustment by the World Bank and the IMF, found themselves with no recourse to public funds to save banks facing bankruptcy or to their capital in which, incidentally, they were already present. One of the explanations given was their indebtedness. Yet, in the current financial context, the American administration and European states are all heavily in debt themselves. Yet, we are now allowing them to go further into debt to finance the rescue operations implemented to save their delinquent banks.

Cleaning house

The UEMOA States had been rather constrained to liquidate their insolvent establishments which made up a quarter of the Union’s banks and profoundly clean up the rest of the system under the umbrella of the Bretton Woods Institutions. The liberal reforms implemented were the liberalisation of interest rates and especially the instituting of safeguard measures to oversee the observance of the banking profession, ensure the quantitative control of banking liquidity, increase the security of the financial system and orient the structure of savings and loans towards real economy. Recovering questionable loans and resolving the States’ arrears also figured among the list of forms.

Liberalisation, regulation and diligence were key words in the process to save the UMOA’s banking system which, in the end, paid off. The sector gradually regained its standing and became visibly more appealing. Similar ailments often require similar treatments. Today’s global financial crisis is a direct result of its blatant deregulation and excessive risk-taking, particularly in the United States. It would be useless to inject billions of dollars in these systems without more stringent safeguards being put in place along with more reliable accounting principles framed with acceptable, more pragmatic rules of transparency.