I.M.F. Provides New Short-Term Credit

The changes come as the I.M.F. gears up to take a yet bigger role in helping ease the European sovereign debt crisis. Risk-averse investors are paring back exposure to Europe, hiking borrowing costs across the Continent. Numerous countries, including Italy, Spain and Hungary, are struggling to finance their debt.

The fund said it approved revisions to help countries with “relatively strong policies and fundamentals” affected by the debt crisis in the euro zone — in its words, “crisis-bystanders.” It said it will be able to offer assistance in a “broader range of circumstances” than previously allowed.

The goal, the fund said, is to “break the chains of contagion.”

“The fund has been asked to enhance its lending toolkit to help the membership cope with crises,” said Christine Lagarde, I.M.F. managing director, said in a statement. “The reform enhances the fund’s ability to provide financing for crisis prevention and resolution. This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.”

The fund is replacing an instrument called the “precautionary credit line” with a more flexible instrument it called the “precautionary and liquidity line.” It will now offer credit to countries in relatively good fiscal shape facing liquidity problems. Previously, the fund offered such credit lines only as a precaution against financing problems for countries that may encounter trouble. It will also provide credit lines with durations as short as six months.

The fund additionally announced that it will consolidate its natural-disaster aid and post-conflict aid programs under a new “rapid financing instrument.”

The changes come as the I.M.F. takes a more prominent role in stemming the European debt crisis and attempting to prevent global contagion.

European leaders have fumbled in enacting their plan to ease countries’ spiraling borrowing costs. For instance, they have not yet fully funded the European Financial Stability Facility, a trillion-euro rescue fund. The half-measures have failed to ease the concerns of global investors, and borrowing costs have kept rising.

A bolstered I.M.F. could provide the liquidity that Europe needs and its involvement could reassure investors, experts said. But the fund would require significantly more resources to be able to help big euro zone countries, like Italy.

Cash-rich emerging-market countries including China and Brazil have indicated a willingness to help ease the euro zone crisis by contributing funding to the I.M.F. At a press conference last week, David Hawley, a spokesperson for the fund, said that “emerging market countries have expressed readiness to augment the resources of the fund.” Some European officials have also floated the idea of the European Central Bank lending to the I.M.F., which would then lend to and help enact fiscal reform in euro zone countries. The fund has declined to comment on the idea.

For now, the I.M.F. is playing a supporting role. But that role is getting bigger.

Later this month, it is sending a team to assess the Italian economy, though Italy has not requested I.M.F. aid.

The changes announced today will help countries seeing borrowing costs rise even if they are in decent fiscal shape. The new resource is relatively modest and would do little to aid large European countries facing heavy debt burdens. For instance, Italy would be able to borrow about $123 billion from the I.M.F., 10 times its current quota. It needs to refinance more than $350 billion of its debt in the next six months alone.

But the new facility might aid smaller countries hurt by exposure to the euro zone crisis. On Monday, Hungary, which does not use the euro currency, announced it had asked the I.M.F. and the European Commission for a line of credit should it need short-term funds. The country does not have as heavy a debt load as many other European countries, about 80 percent of its annual economic activity, compared to 120 percent for Italy. But Hungary is nevertheless facing financing troubles related to problems in the euro zone.

Weak demand in Europe has reduced Hungarians exports and slowed its economic growth. Its currency, the forint, has slumped. It also has problems with its housing market, since a high proportion of Hungarian mortgages are denominated in foreign currencies.

Hungary said it had sought “insurance” from the I.M.F. and the European Commission. A feisty statement by its ministry for national economy promised that the new arrangement would “not increase government debt” and would be taken out only as an “insurance contract” to encourage investment in Hungary and to bolster growth.

Article source: http://www.nytimes.com/2011/11/23/business/imf-provides-new-short-term-credit.html?partner=rss&emc=rss