The International Monetary Fund will seek a smaller increase in resources than the $600-billion (U.S.) the institution had been seeking, a shift that reflects a stronger global economy and entrenched opposition among some powerful members to giving the IMF more money.
In January, as the European debt crisis flared anew, the IMF estimated it would need as much as $1-trillion to adequately defend the global financial system against the worst-case scenario of a big European economy such as Spain declaring bankruptcy.
The amount was more than double the fund’s lending capacity, and managing director Christine Lagarde set about trying to make up the difference by seeking additional contributions from the richer members of her 187-country institution.
In the interim, the situation in Europe has become somewhat less severe. The European Central Bank has lent some €1-trillion ($1.3-trillion) to hundreds of banks, and much of the money has been used to purchase government debt, reducing borrowing costs. Also, the euro zone countries pledged last month to create a financial backstop of about €800-billion to keep governments and banks solvent.
“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 actually restored a little bit of confidence,” Ms. Lagarde said at an event hosted by the Brookings Institution in Washington Thursday. “We are reassessing to a lower number in terms of risk, which will bring me to probably reassess a lower number of additional resources needed.”
Left unsaid by Ms. Lagarde was the difficulty she is having convincing countries to participate in an effort that is widely portrayed as a backdoor bailout of Europe.
Canadian Finance Minister Jim Flaherty is among the most vocal critics, saying as recently as a couple of weeks ago that euro zone governments haven’t done enough on their own to deserve international support.
More importantly, the United States, the IMF’s largest shareholder, flatly rejects the group’s argument that it needs more money. The leaders of the BRICS group of big emerging markets – Brazil, Russia, India, China and South Africa – said at a summit on March 29 that their participation was contingent on being given a greater say in the running of the IMF.
Ms. Lagarde’s decision to scale down her request for new funding comes ahead of the IMF’s annual spring meetings in Washington next week. She declined to provide a new target, although she said the request still would be “sizable” because the risks facing the global financial system remain serious.
Indeed, the improvement in Europe appears tenuous.
The Italian treasury sold the equivalent of $3.8-billion of three-year bonds Thursday at a yield of 3.89 per cent. The amount was less than the government’s maximum target, and the yield was 1.1 percentage points higher than what it cost Italy to attract buyers for a similar bond a month ago.
Italy’s troubles appear to be linked to Spain, where Prime Minister Mariano Rajoy is struggling to retain investor confidence after saying in March that he would only narrow the budget deficit to 5.3 per cent of gross domestic product, rather than 4.4 per cent as originally promised.
The yield on the benchmark Spanish 10-year bond is hovering near 6 per cent, an increase of about one percentage point since Mr. Rajoy’s comments in early March. Greece, Ireland and Portugal all took rescues from Europe and the IMF when the yields on their debt reached 7 per cent.
“Let us make no mistake, the risks and the needs are still sizable and it would be very imprudent to ignore that fact,” Ms. Lagarde said, adding later that she hoped to make “real” progress at the Washington meetings, while conceding that the “path” to a final agreement could be longer.
Domenico Lombardi, a senior fellow at Brookings and a former IMF board official, said Ms. Lagarde is in a negotiation, and it made sense to start talks by targeting a higher amount. Mr. Lombardi said the richer Group of 20 nations could agree next week to a target of about $400-billion, and then sort out how to achieve that amount by the G20 summit in Mexico in June.
Resistance to boosting IMF resources is softer outside the U.S. and Canada. Japanese Finance Minister Jun Azumi said last week that he and his Chinese counterpart will seek to co-ordinate their support. Brazil and Mexico had also indicated they will ultimately chip in, and European countries already have pledged $250-billion.