♠ Posted by Emmanuel in Bretton Woods Twins,Credit Crisis
at 3/09/2009 08:46:00 AM
Reuters has a new article discussing how the EU will call for governments to up IMF funding to $500 billion in light of ongoing financial difficulties in the run-up to the G-20 meeting of April 2:European Union finance ministers are set to back a call from the International Monetary Fund to double its funds to $500 billion to fight the global financial crisis, a document showed on Monday. The move, outlined in a paper seen by Reuters, spells out the EU's position ahead of a G20 finance ministers meeting and comes as a key U.S. policymaker said a coordinated global effort was needed to stimulate demand and drag the world out of recession...A cynic would probably tie EU demands for doubling IMF funding to troubles in Eastern Europe. As Western European banks have lent large sums in former parts of the Iron Curtain, this may be a self-serving plea as troubled Eastern European countries eventually call on the IMF. Then again, where else will increased IMF funding come other than from Western European governments as well? Officially at least, the EBRD is describing the situation in Eastern Europe as "manageable":
"It is essential that the IMF has appropriate financial means to assist countries particularly affected by the current crisis," said the EU draft document, to be approved by ministers of the 27-nation bloc on Tuesday.
G20 officials will on Friday and Saturday discuss how to deal with the global financial and economic crisis, which has made several European countries turn to the IMF for help. The meeting is in preparation for a summit in London next month of the G20, which groups the world's richest nations and biggest emerging economies.
Eastern Europe’s financial crisis is “manageable” so long as western banks continue lending to their units in the region, said European Bank for Reconstruction and Development Chief Economist Erik Berglof. Emerging European nations are struggling to refinance short- term debt as the global crisis that has left banks with more than $2 trillion in losses and writedowns cuts off credit and investment and plunges most of the region into a recession.Going back to the topic of increased IMF funding and to explain the post's title, Ted Truman of the Peterson Institute of Economics proposed something eerily familiar only four days ago in the pages of the Financial Times. That is, $250 billion in SDRs should be made available ASAP to all comers in light of the current situation:
“The key is continued support from banks in Western Europe to their subsidiaries in the east,” Berglof said in an interview yesterday in London. “As long as those flows continue, that’s a very large part of the solution to the problem. The situation is manageable but we must make sure that it is being managed.”
Eastern Europe’s refinancing need is about $200 billion, based on short-term external debt owed by the region’s banks to foreign creditors, Berglof said. Excluding Russia and Kazakhstan, which can use their reserves to support banks, the amount is $130 billion, with more than half owed to western banks by their eastern units, he said. Sustained flows to the subsidiaries will be “a major source of filling the funding gap,” he said. The EBRD is investing a record 7 billion euros ($8.8 billion) in central and eastern Europe this year, compared with about 5.8 billion euros last year.
When the leaders of the Group of 20 nations gather in April, they will have one policy instrument available to address the financial crisis co-operatively, concretely and credibly. They should make a commitment to an immediate, one-time allocation of $250bn in special drawing rights by the International Monetary Fund to its 185 member countries...Either this Truman fellow is psychic or he's been working with EU finmin.
Backers of an SDR allocation are likely to face some tired, out-of-date arguments. First is that the potential credit would be extended without conditions on recipient countries’ economic policies. But that is a plus today. Some countries are not in a position to provide income growth support through monetary and fiscal policies and would use their SDR allocations to do so. In the process, the recent record of economic reforms in many countries would continue because they have less incentive to roll them back.
A second argument against SDR allocations is that they are inflationary. That is not today’s problem. The more likely problem is deflation.
A third argument will be that a substantial amount of the SDR allocation may go to countries that do not need and would not use it. This is an empty argument. If a country did not need to do so, it would not mobilise the SDR-based credit. There would be no benefit, but also zero cost. Furthermore, under current uncertain circumstances, no country can be sure it will not need access to official international credit – witness Iceland.
Finally, countries are free to lend their SDR to other countries or use them to support the policies of neighbouring countries, as is being contemplated in western Europe with respect to their partners and neighbours in central and eastern Europe.
PS: If you still haven't got your fix of IFI gloom and doom, the World Bank estimates the financing gap of LDCs to total between $270 and $700B this year.
PPS: Not to be outdone, the US now says the IMF needs $500B more to bring its total funding to $750B. Let's see if the US can get China to foot the bill.
