Crisis Prompts Calls to Boost IMF Reserves
Tuesday, February 24, 2009
A looming financial crisis in Eastern Europe is fast depleting International Monetary Fund reserves, fueling tensions between the wealthy but cash-strapped countries that have traditionally controlled it and emerging economies that have the resources to shore it up.
The faltering economies of Eastern Europe were on the minds of European leaders as they met in Berlin over the weekend. They called for doubling the IMF's resources, to $500 billion, to cope with crises spawned by the worldwide recession.
Since last fall, the IMF has lent more than $30 billion to Hungary, Belarus, Latvia, Serbia and Ukraine. All have been hurt by collapsing demand for exports; foreign investors who have pulled back sharply, partly to cover losses at home; and falling currency values. And some may be coming back for more.
World Bank officials warned last week that if wealthier countries in Europe fail to help Eastern Europe, economic and political gains made in the region since the fall of the Soviet Union could be erased. Economic distress has already led to the collapse of the government in Latvia, where riots broke out last month. Riots also have taken place in Bulgaria and Lithuania.
Additional countries are expected to turn to the IMF for help as the crisis deepens, raising concerns about the fund's adequacy.
IMF officials said there isn't reason to worry -- yet. At this stage, IMF officials said, doubling the fund's lending capacity, which stood at $250 billion before the crisis, to $500 billion is sufficient to ensure confidence in the adequacy of the Fund's resources.
Including the Eastern European loans, along with loans to Iceland and Pakistan, the IMF has lent about $50 billion, bringing its lending capacity down to $200 billion. Recently, Japan committed an additional $100 billion.
But several analysts doubted that that would be enough if the global downturn lasts well into 2010, as expected.
"What we're now talking about is a global crisis, many countries in many parts of the world. And larger economies," said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels. "There's no chance at all the IMF could be part of a bigger bailout of several big economies at same time."
While some leaders have said they would be willing to help bail out Eastern European neighbors, by calling for other countries to help the IMF bulk up its reserves, they acknowledged that they might not be able to raise the necessary funds for economic and political reasons, analysts said. Countries such as Germany and France, along with the United States, already are spending at least tens of billions of dollars to turn around their own economies.
"I think politically, it would go down easier for German public opinion to channel the money to Central and Eastern Europe through the IMF, rather than giving money directly to country XYZ," said Lars Christensen, chief emerging markets analyst at Danske Bank.
But coming up with additional money for the IMF poses challenges. Countries such as China and the oil-rich Gulf states, which have the resources to contribute, have been reluctant to do so because they have little decision-making power under rules that favor Europe and the United States, which set up the IMF in 1945. They have long complained about the disparity between their voting power within the IMF and growing economic clout. In a position paper released earlier this month in preparation for the G-20 summit in April, Chinese officials said developing countries should have more voting power.