During the global financial crisis, the International Monetary Fund enjoyed a rebirth as a central player in bailing out bankrupt nations after being condemned to irrelevancy in the decade that preceded the Great Recession. “The IMF is back” was an oft-repeated phrase.
Just how much the IMF is back, however, will be determined this week in Europe as desperate officials seek to restore confidence in the euro, the 12-year-old currency whose fate rides on leaders coming up with a convincing program to contain the region’s debt crisis.
Negotiators from the European Union’s 27 members are discussing the creation of a financial “bazooka” that might finally deter bond traders from bidding up the borrowing costs of fragile governments, the Financial Times reported Tuesday.
The plan calls for a speedier creation of a permanent, €500-billion ($677-billion) rescue fund and the continuation of the existing European Financial Stability Fund, which is backed by €440-billion committed by the 17 countries that use the euro currency, the newspaper said.
To complete the attempt at shock and awe, the IMF would be asked to contribute, creating a pool of cash that would convince investors that no European country would be allowed to default, the report said, citing unnamed officials.
The IMF already is intimately involved in the European rescue effort.
Its graceful leader, Christine Lagarde, has been a fixture at every high-level attempt to construct a financial rescue since she became the first woman to ascend to the post in July. The IMF is a minority partner in the bailouts of Greece, Ireland and Portugal. Its economists are in Rome looking over the shoulders of officials in the finance ministry because the Italian government had lost all credibility in international bond markets.
But how much deeper will Ms. Lagarde be asked to go?
It’s a key question heading into the crucial summit of European Union leaders Thursday and Friday in Brussels. Expectations are high that politicians will agree to accept external budget discipline and will create a “firewall” to stop the debt crisis from spreading.
One of the proposals on the table will be boosting the fund’s resources by the equivalent of hundreds of billions of dollars so the IMF could conceivably bail out Italy and Spain, the third- and fourth-biggest economies in the euro zone respectively.
The fund would be left with the financial heft to back its policy prescriptions that it currently delivers only by force of argument and moral suasion. That would be a big shift from the IMF’s current standing in the world, which is largely as the policy watchdog and research branch of the Group of 20 economic powers. The fund is ostensibly a lender of last resort, but it only has the resources to rescue relatively minor economies.
“Its financial firepower has been built around the idea of helping smaller countries,” said Domenico Lombardi, a senior fellow at the Washington-based Brookings Institution and former representative of Italy at the IMF’s board of directors. “Its mandate is broader than that,” Mr. Lombardi said. “If you don’t intervene in the euro crisis, where should it be intervening?”
Yet there is an obvious reluctance to allow the IMF’s influence to grow much bigger than it already is.
When Greece first faced collapse in 2010, the EU initially balked at involving the IMF, uncomfortable with the stigma of turning to an institution that had evolved into an emergency lender for poorer countries.
German Chancellor Angela Merkel and French President Nicolas Sarkozy made no mention of the IMF when describing the outline of their crisis plan on Monday, even though an enhanced role for the fund had emerged is a distinct possibility at a meeting of European finance ministers just last week.
Also quiet on the need for a bigger contribution from the IMF is the fund’s largest shareholder, the United States.
The Obama administration let it be known in the press at the end of last week that the U.S. would not be risking any more taxpayers’ dollars in any expansion of IMF resources. In Berlin Tuesday, Treasury Secretary Timothy Geithner appeared to suggest that Europe’s financial problems should be solved in-house, emphasizing the IMF’s role as an adviser and a provider of independent assessments of budget policies. “We will continue to support a constructive role for the fund,” Mr. Geithner said at a press conference with his German counterpart, Wolfgang Schauble.
The IMF currently has the equivalent of about 290-billion euros available to lend, an amount that is roughly equal to Italy’s financing needs in 2012 alone, according to an analysis by HSBC economist Madhur Ja.
So for the fund to play a bigger role in Europe, it will need more cash. The most plausible proposal would see the central banks of individual European countries make loans either directly to the IMF or to a special purpose facility administered by the fund in Washington. If European countries put up cash, nations with big trade surpluses such as China, Japan and Brazil likely also would contribute.
The IMF’s role could remain unclear until negotiations end Friday. Ms. Lagarde is deeply involved in those talks, blaming the situation in Europe for her tardiness at a public event on the Middle East in Washington Tuesday. Underlining the sensitivity of the issue, she informed her audience that she would be making no comments on Europe and would answer no questions on the subject.