IMF staff sees increased funding needs from crisis

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IMF staff sees increased funding needs from crisis

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IMFs estimates of the amount might need to lend out have risen by more than a quarter since June.

10 September,2011 11:20 am

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 September 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 Europes 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 October 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 IMFs lending resources in the face of the global financial crisis at the time.In the current fragile situation a significant decline in the Funds lending capacity could further intensify market instability. This implies that maintaining the Funds 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.