IMF Changes, Expands Crisis-Prevention Credit Lines
Dominique Strauss-Kahn, managing director of the IMF
SeongJoon Cho/Bloomberg
Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF).
Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF). Photographer: SeongJoon Cho/Bloomberg
The International Monetary Fund, which has shored up economies from Romania to Greece over the past 18 months, approved changes to its credit line program to encourage countries to turn to the fund before crises develop.
Its flexible credit line, reserved for countries that pre- qualify based on sound fundamentals, will be extended for up to two years and have no set limits. A new credit line with additional policy requirements for economies with “moderate vulnerabilities” also was created, the IMF said in a statement.
“These decisions expand and reinforce the IMF’s crisis- prevention toolkit and mark an important step in our ongoing work with our membership to strengthen the global financial safety net,” IMF Managing Director Dominique Strauss-Kahn said in the statement. The changes will “enable the fund to help its members protect themselves against excessive market volatility,” he said.
Strauss-Kahn has sought to enhance the institution’s role as a buttress against financial crises, convincing member countries to pledge $500 billion in emergency funds in 2009. Today’s decision is part of a push before the Group of 20 summit in November to attract more countries to its contingency financing program.
“This change in the approach is consistent with the rapid scale up of international capital flows witnessed in the recent decades, which, at times, may bring about instability in the recipient countries,” said Domenico Lombardi, a former IMF board member, in an interview.
New Framework
“For this new strategy to be effective, however, the IMF needs a new lending framework and commensurate resources. The former is now there, the latter will have to be negotiated,” he said.
Talks are ongoing with member countries to raise the IMF lending capacity to $1 trillion as part of G-20 discussions.
John Lipsky, IMF first deputy managing director, told reporters on a conference call today that the institution has enough money to fund the new credit lines. At the same time, he said he is confident that member countries will continue to demonstrate a commitment for the IMF to have the resources to make the new credit lines “credible and usable.”
As part of these efforts to build a financial safety net, the board discussed, without making a decision, ways to “respond rapidly and effectively in the event of a systemic shock in which chain reactions and spillovers could engender a serious threat to global economic stability,” the IMF said in the statement.
Rebrand Credit Line
The IMF last year already had to rebrand the flexible credit line after it failed to attract a single country. Mexico, Poland and Colombia have since applied and qualified for a total IMF commitment of about $72 billion. They each renewed this year although none had drawn on the credit lines.
The board’s action today doubled the duration of the flexible credit line from one year to two years and eliminated a quota system for loans. Decisions will be made on “individual country financing needs,” the statement said.
The second credit line created today, called the precautionary credit line, targets a wider group of countries that would not qualify for the existing flexible credit line.
The fund “listened closely” to its members when designing the new credit line, Lipsky said.
While applicants must also pre-qualify on criteria including monetary policy and financial sector health, there are conditions attached to ensure the economies address their vulnerabilities. Progress will be monitored through semi-annual reviews, according to the IMF statement.
“The revamped financing toolkit rewards countries that implement strong policies,” Strauss-Kahn said. “We expect that the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system.”
To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net
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