IMF loosens lending rules to combat crisis

Each year, economic policy experts gather in Jackson Hole, Wyo., for the Federal Reserve Bank of Kansas City annual symposium.
Washington Post Staff Writer
Monday, August 30, 2010; 8:14 PM

The International Monetary Fund on Monday further loosened its lending rules in an effort to prevent future financial crises from spreading around the world.

A new precautionary credit line approved by the IMF board will allow countries with less-than-perfect economic track records to be preapproved for substantial loans that they can draw down quickly in a crisis.

It is the second such program the IMF has approved in recent months to allow it to respond more quickly to economic problems that develop in one country but threaten to spread to others. As happened in the recent crisis, which began in U.S. mortgage markets but became global, nations can end up in the path of economic "contagion" through no fault of their own - and a quick response, the IMF argues, can temper the shock.

"The need became increasingly clear to develop instruments that could serve as effective crisis-prevention tools" in a world where money moves quickly across borders, said John Lipsky, first deputy managing director of the IMF.

He said that under "foreseeable circumstances," the IMF had enough funding available from its members to pay for the new program and would not need to ask for more.

Traditionally, IMF loans are extended to countries already in significant economic trouble - and then only after sometimes-protracted negotiations over economic and other policy changes that the country commits to enact.

In response to the recent crisis, the IMF loosened the rules last year and began preapproving loans for some of the world's better-managed economies. Colombia, Mexico and Poland took advantage of the program. Although those countries did not use the available loans, IMF officials argue that their access to IMF funding helped maintain confidence in their financial markets and helped them avoid deeper problems.

The new program will carry the same philosophy a step further, to countries that may have significant problems in one or two aspects of their economic policies - a weak banking system or a large government budget deficit, for example - but are considered to be in generally good shape.

The money under the new program will come with strings attached - a commitment to bolster economic policies that the IMF considers flimsy or troublesome - but that would not hold up access to it in a crisis. The country would agree to a semiannual review.

The agency did not indicate whether any countries are expected to immediately apply for the precautionary credit line and would not characterize how many of its 187 members might qualify for it or how many would fall short.

The program is part of a broader debate about creating a global "safety net" to prevent the type of spreading economic and financial crises that pulled the world into recession recently.

The concept is being pushed in particular by South Korea and other Asian countries that say that the IMF did not move quickly or liberally enough to forestall the financial crisis that spread through Asia in the late 1990s.

Other ideas include offering loans to groups of countries even if they do not ask for help, a strategy that IMF officials think would avoid the stigma associated with appealing to the IMF.

© 2010 The Washington Post Company