The IMF roadshow is coming to a town near you. If you live in China, Brazil or the Gulf, that is...
On Wednesday, the IMF confirmed that it would be asking member countries for extra funds to ensure “adequate Fund firepower to help defuse the current global economic weaknesses and regional challenges”. (Note the emphasis on global, not European weaknesses).
According to media reports citing sources at the Fund, the IMF is looking for an additional $600 billion - $500 billion to lend to member countries, plus an additional $100 billion to be used as a protection buffer. Christine Lagarde, the IMF’s managing director, estimated this week that there could be a $1 trillion global financing gap over the next two years should the global economic outlook worsen.
The IMF currently has $387 billion in available resources, and the new funds would likely be in the form of voluntary, ad-hoc loans, rather than mandatory contributions from member countries.
But given global debt-geddon, where’s the cash going to fall from?
Eurozone member states pledged an additional $200 billion in funds to the IMF last month. But politicians in both the US and UK have regularly voiced their reluctance to contribute additional funds to the IMF, given the likelihood that a large portion of the additional funding would be directed towards the eurozone. As a result, the bulk of the funds will have to come from large emerging economies.
As Eswar Prasad, a fellow at the Brookings Institution think-tank and former head of the fund’s China division, told the FT:
| “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.” |
In other words, the IMF could be transformed into a liquidity lender of last resort for euro-area sovereign balance sheets. Fund-raising will be funneled through the IMF’s general resources account – rather than a trust fund or special purpose vehicle, as previously mooted. This means in theory that the cash could be lent to any of its 187 member countries, though in practice the bulk is likely to go to Europe. If lending to troubled euro-area sovereigns is channeled through the IMF, this would have to be via traditional IMF stand-by arrangements (SBA), perhaps topped up with a precautionary and liquidity line. That’s because credit lines are capped at a modest 10 times a recipient country’s given quota so, in practice, given their large-scale funding needs, the SBA – a strongly conditional facility - would be the default lending channel for the likes of Spain.
Painful structural reforms engineered by technocrats could therefore be the restructuring game du jour in Europe.
Before that happens, though, the IMF will need cash, of course. So the will-China-save-Europe-theme that dominated discussions back in November has come back with a vengeance.
Via Reuters:
| China's Foreign Ministry said on Thursday that the world's leading economic powers should honour a pledge to ensure the International Monetary Fund has sufficient resources to fight financial crises. "In principle, we believe that the task is to implement the consensus reached at the Cannes G20 summit to strive together to ensure that the IMF has ample funds to cope with the current financial crisis," foreign ministry spokesman Liu Weimin told a regular Foreign Ministry news conference earlier today. The statement came in response to a question about whether China was receptive to proposals for a funding increase of up to $600 billion for the IMF. The response stopped short of suggesting that China was ready to put up yet more cash that would likely be channelled to help Europe fight its debilitating debt crisis. |
We leave you with this thought:
China is surely tired of helping out fiscally profligate countries – like the USA – based on perceived mutual self-interest i.e. that boosting the liquidity/solvency of its trading partners will prop up China’s export-led growth model. The relevant issue is to what extent opinion-formers in Beijing and elsewhere make the argument that further attempts to prop up the eurozone will prolong China’s growth formula of old, which entrenches global imbalances, builds financial distortions and delays the rebalancing of its own economy towards more consumption. This is a hawkish argument but relevant. Adding to the policy calculation will be the extent to which Chinese enthusiasts of “south-south” trade will argue that the country’s medium to long-term future is less tied to Europe.
Against this, though, China’s leaders can ill-afford to see a major global slowdown, and the contraction in trade and export manufacturing employment growth that it would bring, given that it also faces major domestic risks at present. And, let’s not forget, there’s a leadership transition coming up in October, and the last thing that president-in-waiting Xi Jinping will want will is to inherit an economy grappling with the fallout from a major global recession. In this context, an extra hundred billion dollars or so may seem a price worth paying.
In other words, debates about China’s willingness to bail out Europe should be seen in tandem with internal discussions about its growth model.
Further reading:
BARRY EICHENGREEN: the IMF must be empowered now
Talks over IMF lending boost inch forward
G20 poised to back IMF resource hike
Support builds for IMF capital boost