IMF Resources to Counter European Crisis to Get Boost Without U.S. Backing
In 2009, the U.S. led a global drive to increase the International Monetary Fund’s firepower to help pull the world out of recession, pitching in $100 billion. This time, it’s a bystander in a similar effort to counter the European debt crisis.
European leaders meeting in Brussels agreed to lend the IMF as much as 200 billion euros ($268 billion), opening the way for aid from nations such as Brazil and South Korea. While the U.S. supports the effort, it won’t participate, an administration official said in Washington yesterday.
Any solution to the crisis should be led by European nations themselves, not the IMF, to assure financial markets, said the official, who spoke to reporters on condition of anonymity. What’s more, the administration of President Barack Obama would be unlikely to convince a Congress divided between Democrats and Republicans to approve money for the fund.
“Obama had a lot more political capital coming in 2009 when he was just elected,” said Julie Chon, a former adviser at the Senate Banking Committee, which authorizes contributions to the IMF. “The crisis that’s confronting the world today is a European-born crisis, so it requires European leadership, while in 2009 we were still fighting the remnants of a U.S. subprime crisis.”
While bilateral loans can be helpful, the IMF can’t substitute for a show of force from European nations, the administration official said. U.S. officials have said in the past that the IMF has adequate resources, thanks to the 2009 campaign.
“Europe is wealthy enough that there’s no reason why they can’t solve this problem,” Obama said Dec. 8 at a White House press conference. “It’s not as if we’re talking about some impoverished country that doesn’t have any resources.”
The pledge by Europeans would provide temporary bilateral loans to the IMF to help it meet a potential increase in loan demand or a request from Spain and Italy for precautionary lending.
The agreement also raises the odds of help from the Group of 20 nations, which held back last month because they said Europe wasn’t doing enough to help itself. The G-20 comprises the world’s leading industrial and developing economies accounting for about 85 percent of global gross domestic product.
“We can contribute if some conditions are met,” Sohn Byung Doo, director general of the G-20 bureau at South Korea’s finance ministry, said in a telephone interview yesterday.
China, whose foreign-exchange reserves of $3.2 trillion as of September were the world’s biggest, reiterated its willingness to help, while stopping short of any indication of when it’s prepared to announce an IMF contribution.
“China has been part of the international effort to counter the financial crisis and China will continue to be part of the effort, because we are interrelated, interdependent,” Vice Foreign Minister Fu Ying said today. “We are in it together. We are in one boat.”
“Europe needs a partner, they come to sell their bonds, that’s a partnership,” Fu, whose portfolio is European affairs, told reporters in Vienna today. “They have to work out the terms, it should be a kind of relationship of cooperation.”
Stocks climbed (SPX) yesterday, sending the Standard & Poor’s 500 Index up for the week, Treasuries fell and the euro rose after Europe set plans to boost its rescue fund and tightened anti-deficit rules.
The S&P 500 climbed 1.7 percent to close at 1,255.19 at 4 p.m. in New York. The euro increased 0.3 percent to $1.3375. Ten-year Treasury yields rose nine basis points to 2.07 percent. The 10-year Italian bond yield fell 10 basis points to 6.36 percent, reversing a 23-point increase.
Obama and Treasury Secretary Timothy F. Geithner, while refraining from committing cash, have pushed European leaders to resolve a crisis that threatens to derail the U.S. economic recovery.
Geithner this week met with European Central Bank President Mario Draghi, French President Nicolas Sarkozy, Italian Prime Minister Mario Monti and German Finance Minister Wolfgang Schaeuble during a three-nation visit to Europe to discuss possible solutions to the crisis. Geithner said he was “encouraged” by efforts by euro zone leaders though their work “will take time.”
With Congress gridlocked on deficit-cutting measures, “the idea of voting to spend money helping advanced economies in Europe would be very difficult,” said Phillip Swagel, a professor of international economic policy at the University of Maryland in College Park and a former assistant Treasury secretary. “We have so many problems at home, including reducing the fiscal deficit,” he said.
Twenty-six Republican senators, including Jim DeMint of South Carolina and Tom Coburn of Oklahoma, introduced a bill yesterday to stop the IMF from using U.S. taxpayer dollars to bail out euro-region countries. The bill also seeks to rescind the credit line the U.S. gave in 2009.
The IMF “has substantial resources, and American taxpayers are not going to have to make any more commitments to the IMF,” White House press secretary Jay Carney told reporters yesterday.
The U.S. may find itself losing clout at the IMF, while emerging markets gain influence with their contributions, said Chon, now senior fellow at the Washington-based Atlantic Council, which promotes U.S.-European relations. She led the banking committee’s negotiations to obtain congressional funding for the IMF in 2009.
“The emerging-market countries know that they will gain reputational benefits by participating in these bilateral loans,” Chon said. “If the U.S. isn’t putting money in the pot, it is also not at the table making influential decisions.”
Brazil and other fast-growing developing nations are seeking a greater voice at the Washington-based fund, which was set up at the end of World War II to help ensure stability of the global monetary system.
Emerging markets, which are growing twice as fast as their developed counterparts, say that their voting power doesn’t reflect their weight in the global economy. They also want to end the tradition of selecting a European to head the institution. The managing director is Christine Lagarde, a former French finance minister.
The U.S. still is the biggest shareholder in the IMF, with a 17 percent vote that allows it to block major decisions. Because bilateral loans will likely go to IMF general resources, the U.S. will maintain a say on which countries get help.
In April 2009, G-20 leaders agreed to triple the fund’s resources to about $750 billion after a surge in requests for loans from crisis-stricken countries such as Hungary and Iceland.
The U.S. supported the increase. Dominique Strauss-Kahn, then the managing director, had been calling for a doubling of resources when he heard from the U.K. and U.S. leaders, as well as from Geithner.
“There was a discussion with Gordon Brown and Barack Obama and Tim Geithner,” Strauss-Kahn recalled in an interview this year, referring to the U.K. prime minister at the time. “They were almost reproaching me, saying, ‘Now, you have announced a doubling; if you want to have an impact, you need more than a doubling.’ I said, ‘Fine, let’s do it.’”
Emergency Lending Pool
The U.S. and Japan each ended up lending about $100 billion and the EU $178 billion. For the first time in the fund’s history, large emerging markets also pitched in, with China pledging as much as $50 billion and Brazil, India and Russia as much as $10 billion each.
These contributions, which are temporary, were subsequently folded into an emergency lending pool. That pool supplements the fund’s permanent resources, also called quotas, which alone would not have sufficed to meet all the bailouts the IMF finances.
The IMF has co-financed bailouts to Greece, Ireland and Portugal and currently has about $390 billion available for lending, which Lagarde has said may not be enough.
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