Tags: EU | euro | IMF | G-20

EU Loans to IMF May Open Door to Aid From G-20

Thursday, 08 Dec 2011 06:35 PM

 

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An agreement by European Union leaders to boost the International Monetary Fund’s resources may open the door to similar loans by nations from South Korea to Brazil in a global effort to stem the European debt crisis.

European leaders meeting in Brussels may agree to make bilateral loans to the IMF of as much as 200 billion euros ($267 billion), an EU diplomat said Thursday. Such a move may draw aid from the Group of 20 nations, which held back last month because they said Europe wasn’t doing enough to help itself.

A deal in Brussels “should pave the way, make it more comfortable for countries that want to contribute to do so,” said Uri Dadush, director of international economics at the Carnegie Endowment for International Peace in Washington. “The Brazilians, the Chinese will be pushing for increased participation.”

Christine Lagarde, the IMF’s managing director, has indicated that the $390 billion the IMF currently has available may not suffice to meet loan demands should the global outlook worsen. Fresh money from the G-20 would enable the fund to help euro-region nations such as Italy and Spain, while also holding enough in reserve for countries outside the 17-member monetary bloc.

“If circumstances require, the G-20 will commit the resources that are necessary for the IMF to play its systemic role,” Lagarde said during a visit to Brasilia last week. The G-20 comprises the world’s leading industrial and emerging economies accounting for about 85 percent of global gross domestic product.

Brazil Willing

Brazilian Finance Minister Guido Mantega Thursday repeated his country’s willingness to lend to the IMF, on the condition that European nations do the same.

“We will do something that will be arranged together with China, India and Russia,” Mantega told reporters in Brasilia.

China is “in active communication” with relevant parties, Foreign Ministry spokesman Liu Weimin said Nov. 16, when asked about a possible Chinese contribution to the euro bailout via the IMF.

Discussions to increase the IMF’s firepower are now taking place within the G-20, Bank of Korea Governor Kim Choong Soo said Thursday, adding that his country will participate in any move by the group. His Mexican counterpart, Agustin Carstens, last week also said his country was willing to help.

The aid may come with a catch: Brazil and other fast- growing developing nations are seeking a greater voice at the Washington based IMF, which was set up at the end of World War II to help ensure stability of the global monetary system. The fund has participated in bailouts of Portugal, Ireland and Greece in the past 19 months.

Voting Power

Emerging markets, which are growing twice as fast as their developed counterparts, say that their voting power at the IMF doesn’t fully reflect their weight in the global economy. They also want to end the tradition that has always placed a European at the head of the institution.

European Central Bank President Mario Draghi Thursday kept the onus on European leaders to solve the two-year debt crisis by repeating his call for a “fiscal compact” and denying he had hinted the ECB would automatically support such an initiative with more bond purchases.

Stocks fell after the comments, while yields on Spanish and Italian bonds rose. The Standard & Poor’s 500 Index lost 2.1 percent to 1,234.35 in New York. The Stoxx Europe 600 Index retreated 1.5 percent, reversing a 1 percent advance. Yields on 10-year Italian and Spanish bonds jumped at least 38 basis points.

IMF Resources

Support for increasing IMF resources as a way to aid Europe gained momentum during the G-20 summit in Cannes last month, with officials from the U.K., Australia and Russia saying they were ready to participate while making sure the fresh cash would be used to help all IMF members.

Leaders failed to agree on a package as they awaited details on Europe’s plan, saying they would ensure the IMF “continues to have the resources” to play a role.

Under the plan discussed by European leaders Thursday, the central banks of the 17 nations that share the euro would channel 150 billion euros through the IMF, while the other 10 EU members that don’t use the currency would chip in another 50 billion euros.

G-20 Decision

Such a move would be similar to a G-20 decision in April 2009 to triple the fund’s resources as part of plan to pull the world out of recession. At the time, the U.S. and Japan each contributed $100 billion, the EU $178 billion and China $50 billion.

Any increase this year would likely occur without the U.S., the largest shareholder in the 187-member IMF with about 17 percent of votes, because Congress would not support it, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington and a former IMF economist.

U.S. lawmakers including Senator Jim DeMint, a South Carolina Republican, and Representative Cathy McMorris Rodgers, a Republican of Washington state, have expressed opposition to any U.S. participation in European bailouts.

U.S. officials “may not be wildly enthusiastic at this stage, but I don’t think they would oppose a move if Europe and a bunch of emerging markets” decide to increase IMF contributions, Prasad said.

A Treasury Department official, speaking on condition of anonymity last week, said the U.S. has no plans to make bilateral loans to the IMF, saying the fund has ample resources.

© Copyright 2014 Bloomberg News. All rights reserved.

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