IMF Revamps Credit Lines for Nations Facing Shocks on Europe Debt Turmoil

The International Monetary Fund revamped its credit line program to encourage countries facing outside shocks to turn to the fund with few conditions attached, as European leaders fail to end their debt turmoil.

The Washington-based IMF said today the new instrument, the Precautionary and Liquidity Line, can be tapped by countries with strong economies currently facing short-term liquidity needs. Funding available will be capped at a percentage of countries’ contributions to the fund, limiting the role the instrument can play in preventing the debt crisis from spreading in Europe.

“The size is too small to be meaningful for Italy and Spain,” said Edwin M. Truman, a former U.S. assistant Treasury secretary who’s now a senior fellow with the Peterson Institute, a private, nonprofit, nonpartisan research organization in Washington. The countries’ economic policies may also prevent them from pre-qualifying for the credit line, he said.

The changes, which enable countries that pre-qualify to request IMF funds without having to make as many policy changes as with traditional loans, come as Europe’s crisis threatens to spread to France and Spain. The IMF is co-financing bailouts in Greece, Portugal and Ireland and is preparing to send a team to Italy for an unprecedented audit of that country’s efforts to cut its debt.

Effective Safety Net

“The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution,” IMF Managing Director Christine Lagarde said in an e-mailed statement. “This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.”

A country can request a Precautionary and Liquidity Line for six months with a limit of five times its quota, which for Italy would amount to about 45 billion euros ($61 billion). That compares with 440 billion euros of bonds and bills that the country is preparing to sell next year. For Spain, 23 billion euros would be available under the credit line.

If the countries apply for a two-year credit line, they could borrow twice as much, with the IMF reviewing their policies every six-months.

Countries with potential needs can also apply, as they did in the past under the Precautionary Credit Line that the new instrument replaces.

The Standard & Poor’s 500 Index pared losses, falling 0.2 percent to 1,190.76 at 2:27 p.m. in New York. The yield on 10- year Treasuries fell 1 basis point to 1.95 percent.

Pressure Mounting

European policy makers have yet to implement a package agreed to last month that includes an increase of their rescue funds, proposed guarantees of sovereign debt and a bid to attract more international loans. Germany today rejected calls from allies and investors to do more to counter the turmoil as Spain’s financing costs surged and pressure mounted on Greek political leaders to submit written commitments to austerity measures.

Even with the IMF new facility, “the story remains the same, we have no solid mechanism in place for Italy,” said Thomas Costerg, a European economist with Standard Chartered Bank in London. “Confidence could probably continue to slip until we get a better response.”

He said the credit line would be better suited for smaller countries such as Hungary.

The revamping of lending instruments is the second in 15 months as the IMF tries to get countries to request funding before crises develop.

Limited Conditions

One of the attractions for countries is the limited amount of conditions compared with traditional loans. Greece’s loan package includes measures to cut public pensions and to sell state assets.

The fund will continue to offer its Flexible Credit Line, which comes with no conditions for nations whose economies are fundamentally sound. It is used by Mexico, Poland and Colombia.

The IMF also said today it is merging existing lending instruments for emergency assistance in cases of natural disasters and post-conflict situations into the so-called Rapid Financing Instrument.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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