Return of the IMF

It's back. For a time it seemed as though the extramarital affair between the IMF's managing director, former French finance minister Dominique Strauss-Kahn, and a subordinate would push the IMF's slightly more momentous decisions into the sidelines. Happily, that embarrassment is over. The Fund was an institution that took itself too seriously and had nothing better to do than chase girls. Now it has found, or re-found, its role, and there seem to be no shortage of customers for its $255bn (£163bn) of available funds, with or without strings. In recent days, impressive rescue packages have been agreed for Hungary (probably $10bn-plus), Ukraine ($16.5 bn) and Iceland ($2.4 bn). More will follow.

Hungary is the centre of attention now, though details of this deal are sketchy. "The policies Hungary envisages justify an exceptional level of access to Fund resources," Mr Strauss-Kahn said. The European Central Bank has furnished Hungary's central bank with a $6.7bn line of credit. Analysts said the IMF's aid should come to over $10bn, based on the IMF's agreement in principle to Ukraine's standby loan, announced on Sunday.

Hungary, like many fast-growing emerging economies, relies heavily on foreign capital inflows to finance its debt and deficits. In this latest phase of the credit crunch, these funds have proven to be unreliable. Now she is in crisis – and is not alone.

The list of nations to be saved by the Fund, or at least helped out of their little local difficulties, is set to grow still longer. The IMF is in talks in Dubai with Pakistani officials.Serbia's negotiations with the Fund pre-date the current crisis, and will no doubt accelerate as a result of it. Belarus has requested assistance. More will follow, and the list of potential beneficiaries of is long: Brazil, Argentina and other Latin American growth stories; Estonia , Latvia and Lithuania; Turkey; Romania and Bulgaria – all fast-developing "emerging markets" which in recent weeks have come under unprecedented pressure as western investors withdraw their funds, destabilising their stock markets, currencies and economies. Most of them tend to be dependent on one or two export staples that have collapsed in recent weeks; commodities of one sort or another and, in Ukraine's case, steel. They have tended to borrow huge amounts in foreign currency to fund their expansion, leaving vast trade deficits.

For some ears this is all a little too reminiscent of the East Asian crisis of 1997, also called by unkind souls the "IMF crisis". Then, Thailand, South Korea, Taiwan, Indonesia and other "Asian Tigers" found themselves similarly exposed. Then, however, the IMF imposed conditions – structural adjustment packages – on these economies that actually made problems worse. Set on a road of massive devaluation and fiscal and monetary contraction, the IMF's prescriptions created unemployment, bankruptcies and political instability.

Longer-term, the consequences were no less momentous, for the IMF crisis also created a new model of economic expansion funded by trade surpluses instead of foreign borrowings. Followed enthusiastically by China in particular, this model created one of the great global imbalances and sowed the seeds of the current meltdown. Because those Chinese and other east Asian surpluses became the counterpart and source of the western borrowing binge,driving interest rates down and investors towards riskier and riskier assets in their "search for yield". Some irony there.

Hungary, Ukraine, Iceland and the others must be hoping that, this time, the IMF's medicine will prove more effective as well as more kind. So far the evidence is that the IMF is looking for a degree of austerity from Ukraine and Iceland that may indeed put rather too much pressure on their enfeebled economies; a far remove from the expansive rhetoric at its recent conference in Washington. Some devilishly painful detail may lie in the details of the IMF's conditions for its various loans, as they become available.

More parochially, the new, post-Asian Crisis model of economic development had a devastating effect on the role and prestige of the IMF. If nations could increasingly finance their economic growth through their own trade surpluses and savings, and finance trade deficits via foreign direct and indirect investment, then the job of the IMF was difficult to see.

However, those private flows have dried up. The worry among western investors is that some or all of these emerging nations will suddenly impose capital controls, leaving investors in emerging market equity, debt and currency funds locked out, their investments worthless. Hence the rush for the door, and hence the need for the help of the IMF in calming matters. Were the IMF now not on hand, those nations might well be tempted to introduce the sort of restrictions on the free movement of capital that were typical in the 1930s, when nations in economic difficulties closed their economies to trade and investment, to the detriment of all. These "beggar my neighbour" polices were precisely the thing that the IMF and the other "Bretton Woods" institutions were designed to prevent when they were founded in 1944.

As Gordon Brown often points out, the world of Bretton Woods has changed beyond recognition. He repeated yesterday of the IMF that: "It should be more like an independent central bank, in my view, than a political committee, which is what it is at the moment... We've got to involve China in there, and all the emerging market economies." In the future, the IMF could well play a role more akin to that of a global independent central bank, helping toregulate world financial marketsand sound the warning on bubbles and impending crises. Yet for now at least, that future is irrelevant; it is somewhat distracted by having to save a few national economies first.