IMF staff see increased funding needs from crisis


  • World
  • Saturday, 10 Sep 2011

WASHINGTON, Sept 9 (Reuters): International Monetary Fund resources could prove to be sorely lacking if global financial conditions worsen and more countries turn to the global lender for financial rescues, IMF staff said in an internal document.

IMF staff estimates of the amount of money the IMF might need to lend out in a worst-case scenario have risen by more than a quarter since June, according to a copy of the internal document obtained by Reuters on Friday.

While the IMF could comfortably commit to lending about $390 billion without putting its balance sheet at risk, in a worst-case scenario it might need to lend about $840 billion, the Sept. 7 document said. That is up from the roughly $640 billion that staff had estimated in a worst-case outlook in June.

The document said upcoming IMF reports would highlight a "marked increase in the risks to financial stability." With the European debt crisis threatening the world economy and doubts over Europe's ability to ward off market attacks, there is a strong possibility more countries will need IMF support.

In a less-worrisome scenario in which policymakers act quickly to get a handle on the escalating debt crisis, IMF staff see a more manageable funding need of about $360 billion, which current resources could cover, the document said.

The IMF is already financing adjustment programs in Greece, Ireland and Portugal, and there are growing concerns that without bold actions the euro zone crisis may soon engulf the larger economies of Italy and Spain.

"An intensification of the recent strains in sovereign debt markets and/or financial systems may result in both additional requests for Fund arrangements that would be expected to be drawn, as well as for additional arrangements that would be intended to be precautionary," the paper said.

The paper argues for keeping an IMF crisis fund - the New Arrangements to Borrow - activated for another six months, running from Oct. 1, 2011 through March 2012.

The crisis fund was expanded 10-fold last year in response to a call by the Group of 20 leading economies in 2009 to triple the IMF's lending resources in the face of the global financial crisis at the time.

"In the current fragile situation a significant decline in the Fund's lending capacity could further intensify market instability. This implies that maintaining the Fund's lending capacity could in itself be a tool of crisis prevention," the paper said.

A Group of Seven meeting of finance chiefs in France on Friday pledged a coordinated response to the slowing global economy and the United States pressed Europe to give financing support to weaker euro zone states.

IMF Managing Director Christine Lagarde in late July, just a few weeks after taking the helm of the IMF, said the fund may need additional resources. "In the not too distant future we will probably have to visit this issue," she said.

The IMF boosted its resources in 2009-10 by turning to member countries for loans to fund the crisis fund or by raising members' subscriptions through so-called quota increases. Some of that new funding still needs to be activated once legislatures approve the resources for the IMF.

With belt-tightening occurring in most advanced economies, which are the IMF's largest shareholders, the IMF has also said it is worth exploring ways for it to borrow from financial markets at short notice to raise additional funding.

The IMF board of member countries met on Friday to discuss options for using a $2.8 billion windfall from the sale of 403.3 tonnes of IMF gold. Proposals so far include absorbing the funds into an endowment; placing the money into a reserve fund, and using it to assist poor countries hit by crisis.

The staff document said that while the number of proposed new funding programs is small, including a 1 billion euro arrangement for Serbia, it is also likely "in due course" that Greece may seek a new extended bailout.

Some IMF members, including emerging markets like Brazil, have expressed concern over the IMF doling out more money for Greece, which has failed to meet fiscal targets under the IMF-EU program. They argue that with the EU leading the 110-billion-euro Greek bailout, the IMF's sway to force needed fiscal adjustments is weakened.

IMF spokesman Gerry Rice on Thursday said the IMF was adequately financed, when asked whether it would be able to handle a bailout for Italy if needed.

"I wouldn't comment on hypotheticals ... but what I can say is that thanks to the actions taken by the membership since the beginning of the crisis, the Fund is in a strong position to meet its members' need as necessary," Rice said.

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