January 18, 2012 3:26 pm
IMF requests $500bn for bail-out loans
The International Monetary Fund has asked its member countries for an extra $500bn to help fight what it says will be a $1tn global demand for bail-out loans over the next two years.
The estimate, presented by Christine Lagarde, IMF managing director, to the fund’s executive board earlier this week, would most likely be financed by voluntary ad hoc loans rather than requiring all IMF member countries to contribute. The IMF currently has $387bn in immediately available resources.
Following the meeting, of the 24-member executive board, which represents the IMF’s shareholder countries, Ms Lagarde said: “I welcome the recognition of the importance of ensuring adequate Fund firepower to help defuse the current global economic weaknesses and regional challenges.”
People familiar with the board discussions said the US – which has already ruled out increasing its own contribution – was most sceptical about the request. The big emerging markets like India and Brazil were more supportive, though emphasised that Europe should be taking the lead in financing its own rescues. The UK took a moderate position, with the eurozone countries the most enthusiastic.
Although the IMF staff did not break down the likely $1tn requirement into regions, the eurozone is likely to account for the bulk of extra bail-outs. An extra $1tn would fund at least reasonably-sized lending programmes for Spain and Italy, whose governments are currently struggling to maintain solvency.
Because the IMF needs to keep a buffer of cash on hand, IMF members will have to put in $600bn in contributions to increase firepower by $500bn. The IMF said that the recent eurozone pledge of around $200bn to the fund would form part of the increase.
Eswar Prasad, fellow at the Brookings Institution think-tank and former head of the fund’s China division, said: “The IMF is making a concerted attempt to transform itself into a deep-pocketed, credible loanmaster and disciplinarian for economies of any size that find themselves in economic distress.”
Contributions to the IMF usually have a budgetary cost of nil, as in essence they involve shifting national reserves from one place to another and IMF member governments receive interest on their contributions. A new round of financing will probably take several months to complete.
Ad hoc loans would not immediately affect countries’ voting power in the IMF, which is determined by a separate contributions process, and would be at the countries’ discretion. The last such round of contributions was made in 2009 to combat the global financial crisis, when around $500bn was raised.
Recently the US administration has faced fierce opposition in the US Congress to increasing its contribution. Having previously said that the IMF was adequately financed, the US administration has more recently said that more funds for the institution would be welcome, but emphasised that it will not give more itself.
The UK has also been placed in a difficult position, with resistance within the Conservative party and from the Labour opposition to increasing its contribution to finance bail-outs in the eurozone.
Copyright The Financial Times Limited 2012.
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