Wednesday, March 25, 2009

IMF to EM "take our money...please"

Article from the Financial Times below.

We will see if Emerging markets look at the IMF as less of a policy instrument for the U.S. in the aftermath of the G20. They are running into an old problem. Transparency is wonderful up to the point information can be used against you.

By Sarah O'Connor in Washington

Published: March 25 2009 02:00 | Last updated: March 25 2009 02:00

The IMF is to overhaul its lending facilities in an attempt to propel more money into emerging market countries and lessen the stigma attached to tapping the fund.

Spurred into action by growing strain in emerging markets and calls from the G20 for the fund to take a bigger role in the crisis, the IMF said on Tuesday it would bring in a new lending facility and modify the conditions and repayment structure for its other loans.

The new "flexible credit line" facility would act like an insurance policy: countries would sign up to the fund for a fee, but only choose to access money when they needed it. The IMF wants the facility to be largely preventative, encouraging countries to draw on its money early rather than waiting until a full-blown crisis drives them into the hands of the lender of last resort.

It is aimed at essentially strong and well-run emerging market economies suffering as exports drop and external financing dries up.

There has been deep reluctance among such countries, especially in Asia and Latin America, to turn to the IMF for help because of fears the news would spark market panic.

The IMF's last attempt to help these countries was soundly rebuffed. Its "short-term liquidity facility" (SLF) has failed to attract a single borrower since its launch last year, and is being shut down.

Senior officials say they have taken on board criticisms of the SLF, including that the money had to be drawn immediately, and paid back too quickly. Countries will have up to five years to repay the flexible credit line money and there will be no cap on how much they can borrow.

Unlike the IMF's more traditional loans, the money would not be drip-fed or attached to policy conditions. However, any country wishing to sign up would have to meet strict qualification criteria such as sustainable public debt, low and stable inflation, and a current account deficit that is not too high.

Officials say they have been consulting with emerging market countries about the plan, and have had "quite an enthusiastic response".

The IMF moved on Tuesday to tweak the way it charges interest on loans more broadly, and the conditions it attaches to them. It will get rid of "structural performance criteria", which were a rigid means of compelling borrower countries to reform.

It will also eliminate an administrative mechanism designed to induce early repayments, which will in effect lengthen grace periods and simplify repayment schedules.

The fund also made another push to expand its resources on Tuesday.

The US called last month for a tripling of its firepower, though some Europeans would prefer to see no more than a doubling. Japan has already provided the IMF with an additional $100bn (€73bn, £69bn), boosting the fund's lendable resources available to address the current crisis to about $350bn, and the European Union has committed €75bn ($102bn, £70bn).

The IMF said efforts were under way to drum up more commitments ahead of the G20 meeting in London next week.

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