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21st Jan 2022

IMF unlikely to play major role in eurozone rescue

  • IMF boss Lagarde is refusing to comment on eurozone issues in her public appearances (Photo: International Monetary Fund)

Hopes that the International Monetary Fund will ride in on a white horse to save Europe are likely to be dashed, as key players on its board believe that while the Washington-based lender should play some role, the eurozone has enough resources to solve the crisis itself.

US Treasury secretary Timothy Geithner said after a meeting with German finance minister Wolfgang Schaeuble in Frankfurt on Tuesday (6 December) that IMF will continue to be “helpful” but that the central role lies with the European Central Bank.

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“Of course it has a role to play,” said the finance chief of the largest contributor to the IMF in brief comments to the press.

"The IMF exists in some ways for this purpose," he continued, but referred only those activities the fund has long been playing in the euro crisis.

"The IMF can play a very helpful role in terms of not just providing advice and design of reform programmes, but also to provide an independent objective public assessment of the progress countries are making in meeting those basic commitments."

Reports from across the Atlantic suggest that the fund may be willing to chip in some extra financing but that the eurozone itself should be deploying its own resources.

It is understood that the Americans, who contribute just under 18 percent of the IMF’s resources, have in recent weeks become more open to greater participation in any rescue, but still insist that substantial role for the IMF should be viewed strictly as a last resort.

Heading into an election year, the Democrats do not want to be saddled with the accusation of committing still more public funds to bail-outs, but this time of other countries.

Subsequently in Berlin, Geithner dismissed reports of the US Federal Reserve loaning $100 billion to the IMF in order to buttress eurozone economies,

"I would say the reports I've read in the press about what the Fed can do are not accurate," Geithner said.

Additionally, it is understood that the UK, believing there to be sufficient funds in the eurozone to save the single currency, does not favour the use of IMF resources to top up the eurozone’s bail-out funds at a time when the likes of China have balked at bilateral involvement in these vehicles.

There is no opposition in London however to calling on IMF monies for participation in potential bail-outs of more eurozone countries, but on a similar scale to the level of participation by the fund in the rescues of Greece, Ireland and Portugal.

Discussions amongst the world’s leading economies about deployment of IMF firepower were launched in early November, and European finance ministers considered the idea last week in Brussels.

"We ... agreed to rapidly explore an increase of the resources of the IMF through bilateral loans, following the mandate from the G20 Cannes summit, so that the IMF could adequately match the new firepower of the EFSF and co-operate even more closely," eurogroup chairman Jean-Claude Juncker told reporters after a meeting of eurozone finance ministers on 29 November.

IMF boss Christine Lagarde is closely involved in discussions on the various crisis response options, although she is refusing to take questions on the eurozone crisis in her public appearances.

Alongside a potential boost to the EU’s own firewall - likely via a convergence of both the existing, temporary eurozone rescue fund, the European Financial Stability Facility, and the permanent fund, the European Stability Mechanism, a combined sum amounting to some €940 billion, the IMF could then establish an additional war-chest or contribute to the eurozone pool.

The very existence of this war-chest would be intended to send a message to investors that the world will not let eurozone countries go bankrupt.

The problem is that the IMF, whose own resources amount to an available €290 billion, currently does not have the cash for such an exercise. Rome must roll over €300 billion next year and Madrid some €110 billion.

So a boost to the IMF’s resources would first be required. One option would see the central banks of EU states or their governments themselves lend to the IMF, which could then deliver the cash back to troubled eurozone lands.

The advantage to this circuitous route of financing peripheral EU states would be that the strict conditionality the IMF could impose from outside.

Moreover, if EU states were willing to stump up their own cash, they would be more likely to convince other countries to chip in.

Brazilian officials have said in recent days that they are in the process of cobbling together just such a package finance.

Another option would be to access IMF ‘special drawing rights’, a sort of overdraft facility that all members of the fund can call upon that allows them to borrow from other member-countries’ foreign currency reserves.

However, this would also need to be expanded sufficiently to address the scale of the eurozone threat - covering not just Italy and Spain, but also other potential costs resulting from bank bail-outs and countries in existing rescue programmes that could require additional assistance.

Once before, in 2009, at the London G20 summit, world leaders agreed to expand IMF SDRs to $250 billion.

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