The IMF has asked for as much as $500 billion, including approximately $200 billion from euro countries, to address an estimated $1 trillion funding need in the next few years. So the IMF, intent on protecting economic growth, may provide the firewall that the euro-zone rescue fund, the European Financial Stability Facility, is struggling to create. This may be more timely than ever after S&P’s rating cut threw the EFSF’s borrowing costs into doubt. But would the IMF fund be enough to stem the euro crisis?
The IMF won’t discuss the options for funding until it has completed full consultations with all of its member countries. Still, based on its funding increase in 2009, when its resources were tripled in response to the global financial crisis, the possible avenues are clear. Then, the G-20 met in London and agreed to add $500 billion to the IMF’S lending capacity, raising it to $750 billion. This was funded in two ways: $500 billion via bilateral loans from member countries and $250 billion in so-called special drawing rights. SDRs are essentially a basket of currencies comprising the U.S. dollar, euro, sterling and yen. Increasing SDRs is like a form of global QE or cash injection. In theory, boosting SDRs could ensure the IMF has enough funds, but in practise, amounts over $250 billion face political opposition in the U.S., which effectively has a veto in the IMF.
In 2009, the rest of the IMF’s funding increase came via bilateral loans, including from European national central banks. The European Union contributed $178 billion, the U.S. and Japan $100 billion each, China as much as $50 billion, with a number of other countries chipping in $10 billion or less. Countries tend not to count these loans as adding to their fiscal deficits—they are generally viewed as shifting foreign reserves to the IMF. This is also why a G-20 official told Bloomberg they were pushing for China, India, Brazil, Russia, Japan and oil-exporting countries to be the top contributors.
Even so, there may be a price to pay.The last time developing countries were asked to increase their contributions, their voting rights also rose as they asked for a bigger say in the running of the IMF in return. More than 6 percent of the quotas shifted to developing countries, making the BRIC countries among the top 10 shareholders in the Fund at the cost of European nations trimming their stakes. China’s share will more than double to 6.4% following the reforms. If they pitch in this time, what will be the cost? This is especially relevant as the U.S. has said that it won’t contribute. The U.K. and Japan have said they won’t either, unless the G-20 reaches an agreement at its meeting in Mexico on Feb. 24-25.
The IMF may have the potential to stem any liquidity crisis, but politics and concern the euro zone faces solvency problems may mean the fund won’t be big enough to be an effective firewall.