IMF puts its hand out - again

IMF Seeks More Funds to Help Europe

The International Monetary Fund wants to raise hundreds of billions of dollars to boost its financial firepower, despite U.S. resistance, to cope with the effects of Europe's debt crisis.

Wall Street Journal,

18 January, 2012

The IMF said Wednesday it is seeking $500 billion in new lending capacity, including about $200 billion in commitments last month from euro-zone members.

The IMF plans indicate a growing willingness of some nations to bear the costs of rescuing the troubled euro zone, but also a lack of consensus on how to do so. The fund didn't say how it might seek to raise the money or how it would be used.

"At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations with the Fund's membership have been completed," an IMF spokesman said Wednesday.

The fund's latest efforts highlighted the grim outlook for the 17-nation euro zone. Euro-zone nations have struggled to raise enough money on their own to contain the crisis because of political and financial obstacles.

On Monday, Standard & Poor's Ratings Services downgraded the euro zone's existing €440 billion ($560 billion) bailout fund, the European Financial Stability Facility, following the downgrades last week of nine nations in the currency bloc. The move constrains Europe's ability to increase the EFSF's firepower by borrowing against it.

The IMF, the world's emergency lender, currently has almost $400 billion in available resources. While that amount is plenty for the IMF's usual lending programs to small economies, it is far too little to rescue larger debt-burdened nations such as Italy and Spain.

Europe's financial turmoil also could spark economic crises in other parts of the world. The IMF staff estimated the fund could need about $1 trillion to meet global financing needs in the coming years.

Raising an additional $300 billion won't be easy. The U.S., the largest IMF shareholder, has resisted expanding the IMF's role in rescuing Europe, arguing that the Continent's wealthy nations can afford to do it themselves. Previous discussions about increasing the IMF's lending capacity in Europe failed to gain traction 

because of concerns among the U.S., U.K. and other major powers that doing so would distract from the euro zone's own efforts, potentially letting Europe off the hook for solving its problems.

"We continue to believe that the IMF can play an important role in Europe, but only as a supplement to Europe's own efforts," Treasury spokeswoman Kara Alaimo said Wednesday. "Europe has the capacity to solve its problems. The IMF cannot substitute for a robust euro-area firewall."

The U.S. "told our international partners that we have no intention to seek additional resources for the IMF," she said.

The U.S. has backed the IMF rescues of smaller euro-zone nations, including Greece, Ireland and Portugal, which drew about $100 billion of the fund's money.

Greece's bailout remains troubled. Government officials resumed talks Wednesday with private creditors over restructuring the country's debt, but they concluded the day without a resolution and planned to resume on Thursday.

The Obama administration would be unlikely to get more money from Congress for the IMF if it tried. Some Republican lawmakers want to rescind U.S. funds already committed to the IMF. Euro-zone nations, after coming up with their pledge of almost $200 billion last month, have warned that they've reached their limit given ratings downgrades and political resistance.

China, Brazil, Russia and other emerging nations have indicated a willingness to help Europe. But they maintain that European nations must do more first to help themselves. Some nations, including China, are likely to want something in return—either more power at the IMF or some other concessions.

Some experts and policy makers maintain that the world needs far more money than even the IMF is seeking in order to contain the growing crisis.

The $500 billion proposed by the IMF "is not nearly sufficient to provide bailouts for Italy and Spain," said Desmond Lachman, an economist at the American Enterprise Institute and former IMF official. He estimates that Italy could need $750 billion and Spain could need $450 billion for bailouts. "Additional money would have to be ponied up by the Europeans."

Those and other nations in the euro zone also face growing economic strains, raising the risk that they'll need more than outside loans to recover.

"We should by now have learned that official financing is not going to solve a solvency problem," Mr. Lachman said. "We should also have learned that subjecting countries to severe fiscal austerity in a currency union is going to produce deep recessions in the periphery, especially given the credit crunch in Europe and the bad external environment. 

And deep recessions are only going to complicate the periphery's public finance problem."