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IMF May Create 6-Month Credit Line for Countries Facing Shocks

The International Monetary Fund may create a six-month credit line for countries facing shocks, officials from Group of 20 governments and IMF said, as the European debt crisis rocks global financial markets.

The amount would be capped at five times a nation’s contribution to the Washington-based IMF, known as a quota, making the credit line best suited for smaller countries, the people said. It is likely to be endorsed at a meeting of G-20 leaders this week in Cannes, France, where European nations will seek financial support from other members, said the three officials, who declined to be identified because the plan hasn’t been made public.

The instrument would be the latest in a set of IMF tools intended to increase liquidity as Europe’s crisis threatens to spread beyond Greece. It could be used as part of a broader international package to aid larger economies such as Spain, with IMF participation serving to reassure other creditors, said Bessma Momani, a political science professor at the University of Waterloo in Canada.

“The worry of most of these creditor countries is, ‘Who’s watching?’ said Momami, who specializes in the IMF and its policies. “This is in a sense a demand of creditor countries -- - Russia, China, the Gulf countries -- that before going to the G-20 there is some sort of confidence-building measure that the IMF will not let this go.” She said the line could also be used by smaller countries such as Egypt or Tunisia to meet short-term cash needs.

Rescue Details

The G-20 meeting will focus on protecting the global economy from Europe’s woes, with the region’s leaders under pressure to give details on how they plan to enhance the capacity of their rescue fund to 1 trillion euros ($1.37 trillion) as announced last week.

The new liquidity facility would require few conditions for eligible countries. By contrast, nations such as Greece have received traditional IMF loans on condition that they take measures to overhaul their economies, such as cutting public pensions and wages or selling state assets.

Still, funding available under the new IMF line would be small compared with the potential needs of a country such as Italy, which European leaders are trying to protect from the debt crisis.

The most that the euro region’s third-largest economy could obtain is 44 billion euros. Italy has 1.9 trillion euros of debt, and economists at Citigroup Inc. and Royal Bank of Scotland Group Plc say the European rescue fund needs to be at least 2 trillion euros to protect the country.

Little Demand Seen

“To be relevant for the current crisis in Europe, this new facility should provide unlimited access on a precautionary basis,” said Domenico Lombardi, a former IMF board official and a senior fellow at the Brookings Institution in Washington. With a cap, “I don’t see a huge demand” for it.

The IMF over the past 2 1/2 years set up two precautionary instruments to encourage members to turn to the fund before crises develop. Its flexible credit line, reserved for nations that pre-qualify because their economies are fundamentally sound, can be obtained for up to two years with no conditions or limits on the amount.

The second credit line is offered to countries with “moderate vulnerabilities” and potential needs for cash and comes with a limited set of conditions.

Unlike the existing credit lines, the new one would be available to countries already in need of cash to settle international transactions.

IMF spokesman William Murray declined to comment today and referred to a statement this week saying the fund has been reviewing its lending instruments.

Mitigating Contagion

“The aim of the review is to enhance the ability of the Fund to mitigate contagion by providing liquidity to countries with relatively strong policies and fundamentals that are affected by heightened global or regional financial-market stress,” the IMF said on Oct. 30. “The planned enhancements to the financing toolkit are meant to address the needs of all eligible member countries and are not targeted at particular countries.”

Creating a new facility may stretch IMF resources as more countries seek assistance. Managing Director Christine Lagarde in September said the $394 billion available for lending may not suffice if the global economy were to worsen.

The G-20 will discuss whether IMF resources need to be increased. That idea is splitting the group as emerging market nations including Brazil support a boost, the U.K. signals it’s open to the idea and the U.S. plays down the chances of it occurring.

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