IMF hits right note in extending credit lines

April 16, 2009
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, WASHINGTON, Apr 16 – After a first failed attempt, the International Monetary Fund appears to have found a way of providing a badly-needed cash lifeline to countries hit by the global economic crisis.

Its newly created Flexible Credit Line (FCL) attracted its second customer on Tuesday — Poland — and the hope is other nations such as South Korea or Singapore may be drawn into considering the offer in the coming weeks.

Four weeks after it was launched, the new measure is already been lauded as a success, turning the page on the IMF\’s earlier failed attempt to help countries caught in the credit squeeze — dubbed the "short-term liquidity facility."

"The IMF has succeeded in making the short-term instrument highly attractive. The stigma of coming to this IMF window has been substantially reduced," said Desmond Lachman, a researcher with the American Enterprise Institute.

Mexico became the first country to take up the offer on April 1, asking for a 47-billion-dollar credit line. It was followed by Poland on Tuesday who requested 20 billion dollars.

But the ingenuity of the new scheme lies in its detail. Neither country may end up actually using the funds, and if they do the interest rates will be minimal.

Under the former IMF scheme set up in October and which failed to attract a single taker in five months, countries had to take up the credit and pay it back as quickly as possible — something which put off many potential candidates.

Global markets have reacted positively to the new credit line measure showing that it is seen as a sign of consolidation not of distress. Both the Mexican peso and the Polish zloty rallied after the announcement.

"In the current environment it is a positive instrument," said Daniel Bradlow, a professor at the American University in Washington.

"Emerging markets, or at least some of them, are having difficulty accessing financing for reasons beyond their control, and this addresses that problem."

The IMF, which is extending the facility only to those nations which it considers are well managed, is delighted with the results so far.

Polish Finance Minister Jan Rostowski said Tuesday that Warsaw had asked the International Monetary Fund to open the credit line saying: "This will increase the reserves of the Polish central bank by one third."

The move would "immunize Poland against the virus of the crisis and the attacks of speculators," Rostowski said, insisting: "This isn\’t emergency funding."

IMF head Dominique Strauss-Kahn welcomed Poland\’s move, noting its "economic fundamentals and policy framework are strong, and the Polish authorities have demonstrated a commitment to maintaining this solid record."

Neither Poland nor Mexico are seen as at risk of defaulting on the loan, nor are they likely to see a rapid loss of investor confidence such as was felt by Iceland and Ukraine.

Mexico\’s decision to seek a helping hand from the IMF shows just how cautiously some countries are managing their budgets amid the economic crisis.

Mexico, which still has large reserves of foreign currency, has always been reluctant to turn to help in Washington.

Lachman believes there are plenty of other potential candidates for an IMF credit line, including such countries as Brazil, Chile, Colombia, South Korea, the Czech Republic and Singapore.

But economists at Merrill Lynch believe the IMF also wanted "to create a mechanism to support some industrialized countries.

"In Europe, Ireland must be at the top of policymakers\’ concerns, but Spain and Greece are also on the radar screen," they said in a statement.

"The IMF is now picking off the low lying fruit — i.e. the easy cases," said economics professor Bradlow.

"The real test will come either when a country whose situation is less clear applies to access the facility or when one of these countries tries to use the facility."

Those countries seen as well-run by the IMF are indeed those which have not radically changed their economic policies.

But that is not the case for everyone.

Turkey has been in negotiations for months, hoping to secure a loan under the tried and tested "stand-by agreement" process.

More expensive and more rigorous, it calls on the borrower to cut its budget deficit and undertake serious reforms which many governments eschew.

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