Thursday, December 1, 2011
Analysis: Deal building to pump up IMF to handle Europe fallout
(Reuters) - A deal is building to boost the International Monetary Fund's resources even as the world presses euro-zone leaders to put more of their own firepower on the line to defeat a debt crisis that threatens global growth.
Mexico, which assumes on Thursday the rotating presidency of the Group of 20 nations, said on Wednesday it would make increasing IMF resources a priority. IMF members agree the global lender needs more money to handle the fallout from the euro zone's fiscal mess.
The effort raises two issues: whether Europe is doing enough on its own to deal with the crisis and where the money for the IMF will come from.
Some G20 officials see increased IMF funding as a potential "grand bargain" in the making: Euro-zone leaders would commit to credible deficit-reduction plans and easier monetary policy, while countries with current account surpluses would pump more money into the IMF.
The motivation is to prevent Europe from pulling the rest of the world into a deep recession. Funding from the IMF, accompanied by ECB bond purchases, would buy euro-zone countries some time to put political mechanisms in place for strong fiscal discipline.
In a major development on Tuesday, euro-zone governments said they were looking at providing bilateral loans to the IMF from national central banks, a move that would mark a critical first step by Europe to meet international demands that it use more of its own money to tame the crisis.
Within the euro zone, lending through national central banks would circumvent any concern that the European Central Bank was funding profligate governments.
Making the IMF the sole task master for governments receiving aid could also bolster the credibility of austerity programs.
"Nobody wants to spend money on something they doubt would work," a G20 source said. "The threshold for seeking IMF help is quite high. Those seeking help need to be willing to give up some of their jurisdiction on fiscal policy and willing to undergo painful reform. Mere pledges and speeches won't do," the official added.
PRESSURE FROM ABROAD
Countries outside of Europe have consistently said the 17-nation currency bloc must help itself first before they would consider putting money on the line.
"The thing that must be done first is that the euro zone countries have to commit adequate resources, nothing happens from our point of view until that happens," Canadian Finance Minister Jim Flaherty told Reuters Insider on Wednesday.
"The primary role for the IMF, with more resources, should be to help other countries in the world that have negative effects from the crisis in Europe."
There is a growing feeling quick action is needed.
The crisis has already engulfed some of the area's largest economies. Italy has been in preliminary talks about possible IMF financial support and Spain has indicated it could turn to the global lender.
But the financial needs of both Spain and Italy would be beyond what the IMF can currently afford.
The IMF's lending capacity is roughly $380 billion. G20 officials estimate it needs roughly between $400 billion and $500 billion more. The bulk of that additional lending firepower would likely come from surplus-rich nations such as China, Saudi Arabia, Germany and Japan. Countries such as Canada, Australia, Singapore, Russia and Brazil could also pitch in.
An IMF document leaked to Reuters in September said the IMF's potential needs totaled about $825 billion if larger economies such as Italy and Spain required a bailout.
Emerging market countries such as Russia, Brazil and China have indicated a willingness to provide more IMF funds, but have said any help should not be for Europe alone. Brazilian government officials have said any resources it provides should count towards greater voting power.
A proposal to boost IMF resources could start falling into place at a G20 deputies meeting in Mexico on December 12-13, one official said, although a program for the meeting circulated made no mention of the euro-zone crisis nor IMF resources.