confrontation with the International Monetary Fund since it was founded more than five decades ago.
The clash is brewing as Washington gets ready for an estimated 10,000 bankers, finance officials, consultants, and journalists to arrive for the annual IMF/World Bank meeting, which officially starts today.
At the heart of the conflict is growing opposition to IMF proposals to revamp the rules of the game for lending to emerging markets.
The proposals, presented by the IMF last April in a paper titled "Strengthening the Architecture of the International Financial System," call for improving transparency, internationally accepted standards, surveillance, and monetary policies.
"It's very much going to be the focus of the meetings, and it could get very ugly,'' said Elizabeth Morrissey, managing partner at Kleiman International, a Washington financial consulting firm. "People are gearing up for some pretty heated arguments."
Bankers do not take issue with many of the proposals. But a section of the plan laying out new rules for the private sector in preventing and helping resolve financial crises has triggered their ire.
These proposals, they say, boil down to letting loan and bond contracts be ripped up and rewritten if a country runs into problems. They also say that any aid the IMF provides to a country in difficulty would be conditional on banks' and private creditors' coming up with an accompanying package, even if that country has already gone into arrears. The proposals would also prohibit banks from suing to seize collateral and give the IMF power to continue lending to a country even after it has defaulted.
Banks and financial institutions, which usually favor a low profile, are becoming vociferous. In the strongest attack so far, the Washington, D.C.-based Institute of International Finance, representing about 300 financial institutions worldwide, openly rejected the IMF's suggestions.
Speaking at a press conference in Washington on Thursday, the institute's managing director, Charles Dallara, suggested that the IMF direct its efforts to "strengthening the framework for sustainable flows of capital to emerging markets" and to ensuring that "policies are not instituted that could have the opposite effect."
The institute warned the IMF that its efforts to force lenders to Pakistan, Romania, Ukraine, and more recently Ecuador, to modify bond contracts and supply fresh cash after those countries had threatened to default could easily backfire. "Such action would add to market concerns and could have negative implications for other borrowers in emerging markets," the institute stated.
Bankers also argued that the proposals are unworkable.
"Ten years ago you could put 10 to 12 bankers in a room and restructure a country's debts," said a banking source. "Now you're talking about banks, two or three dozen mutual funds, and thousands of retail investors."
They add that the proposals could also generate "moral hazard" -- industry slang for saying that a country capable of paying its debts might deliberately default in order to get a better deal.
The IMF drew up its proposals in response to complaints among its main shareholders, the governments of the leading industrialized countries, that the agency expects them to bail out the banks whenever their emerging-country borrowers get into trouble. These so-called G7 countries say that after bailing out Mexico, Thailand, South Korea, Russia, and Brazil, among other debtors, the IMF can no longer be the lender of last resort. Supporting the G7 countries is the U.S. Congress, which says banks and investors helped trigger the crises by reckless lending, and then got a free ride out at taxpayers' expense.
To be sure, banks share many of the IMF's concerns and agree that crises could be avoided and mitigated by improving accounting and reporting practices, making information on capital flows more readily available, and getting debtor countries talking to creditors about possible problems.
Third parties are also offering their good offices in an effort to strike a balance between the IMF and the private sector.
"Unrestricted capital mobility and the absence of an international lender of last resort are not a recipe for a stable financial system," cautioned Mervyn King, deputy governor of the Bank of England in a speech at the Federal Reserve Bank of New York this month.
"The crux of the problem lies in the short-term nature of flows,'' he said, and until control systems are installed for monitoring and managing them, crises will recur.
Control systems will not eliminate the risk of financial crises, he added, but can still "reduce the frequency and severity of crises."
As the tone of the rhetoric mounts, banks are becoming increasingly blunt. According to institute estimates, emerging market exposure at U.S. banks today amounts to about 29% of capital, compared with 240% in 1982.
Over the last 10 years, banks and private investors have lent $1.7 trillion to emerging markets, far outweighing the $320 billion from official lending agencies such as the IMF, World Bank, and InterAmerican Development Bank.
"Banks can absorb losses more readily today,'' said Lex Rieffel, director and senior adviser at the Institute of International Finance, pointing out that private creditors have over the last two years swallowed $350 billion of losses in Asia and Russia.
"The corollary to that is that official sector can't exert the same kind of leverage over banks," Mr. Rieffel added.
Faced with the prospect of accepting an unpalatable debt restructuring, banks and bond markets "will take a walk."