Lagarde Cuts IMF Funding Request as Economic Risks Abate

International Monetary Fund Managing Director Christine Lagarde said she will scale down her request for $600 billion of additional resources as threats to the global economy diminish.

“Some of the dramas that were envisaged at the end of 2011 or very beginning of 2012 not only have not materialized,” but some “good news” has “restored a little bit of confidence,” Lagarde said in Washington today. The IMF is reassessing risks, “which will bring me to probably reassess a lower number of additional resources needed.”

Europe’s handling of its debt crisis has slowed Lagarde’s attempt to increase the fund’s lending power as countries including Brazil, China and Canada awaited more efforts to stem the turmoil before pitching in. While euro nations have pledged to pitch in 150 billion euros ($231 billion), the U.S., the fund’s largest shareholder, has refused to join in.

With European governments’ recent move to increase their crisis defenses, Lagarde said she hopes to make “real progress” on getting additional funding when the IMF’s 187 member nations meet in Washington next week. While data indicate economic improvement in economies such as the U.S., she singled out a worsening of the European debt turmoil as the largest risk to global growth.

“Let us make no mistake, the risks and the needs are still sizable and it would be very imprudent to ignore that fact,” she said at the Brookings Institution.

Spanish Borrowing Costs

Lagarde’s comments came as Spain sees borrowing costs nearing levels that prompted Greece, Ireland and Portugal to seek bailouts.

Spain’s Prime Minister Mariano Rajoy is trying to regain investors’ trust with the deepest austerity measures in more than three decades after saying last month the country would miss a 2012 budget deficit goal. Faced with a recession and unemployment nearing 24 percent, the government is also pushing rules making it easier to fire staff and tightening the government’s grip on regions that overspend.

“What Spain has done is laudable” and “needs to be continued,” Lagarde said today while warning that efforts need to be made “over the right amount of time so that it does not strangle growth.”

The IMF is co-financing bailouts in Greece, Portugal and Ireland. It currently has about $380 billion available to lend and was seeking to boost that by $500 billion by getting $600 billion in new contributions.

Start, Then Recalibrate

“You always start the game with a higher figure and then you recalibrate as you have more information about the players,” said Domenico Lombardi, a former IMF board official and a senior fellow at the Brookings Institution. The fact Lagarde “alluded to a lower number just means that we may be closer to an agreement, albeit still rough and preliminary.”

Emerging markets including Brazil and Mexico have indicated they are ready to participate. Japan and China will seek to coordinate their support, Japanese Finance Minister Jun Azumi said last week.

Lagarde said a recent decline in China’s current-account surplus is a “great result,” though “what’s important is to see exactly what the rebalancing is about.”

She said IMF initial forecasts for the broadest measure of trade indicate that the surplus will increase again to a range between 4 and 5 percent of gross domestic product, from less than 3 percent now. She did not indicate a year for the prediction.

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