Published October 31, 2008

IMF opens purse without strings attached

Offers short-term loans to countries hit by crisis as more expect trouble

By CONRAD TAN
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(SINGAPORE) Once again, the International Monetary Fund finds itself defined by crisis.

Mr Strauss-Kahn: 'Exceptional times call for an exceptional response.'

In the space of just five days, the IMF has approved some US$35 billion in emergency loans to three countries - Iceland, Ukraine and Hungary - and several others, including Pakistan and Belarus, have asked it for help.

And on Wednesday, the IMF said that it would extend up to US$100 billion more in short-term loans to developing countries that have been hit hard by the financial crisis but are sound economically, with no conditions attached.

Under its traditional lending programmes, the IMF usually imposes strict conditions on the borrowing country, including limits on government spending and forced interest rate hikes, to ensure that the loan is repaid. Critics say such policies caused unnecessarily painful economic upheavals in countries such as Indonesia.

'Exceptional times call for an exceptional response,' IMF managing director Dominique Strauss-Kahn said in a statement.

'Even countries that have excellent track records of implementing strong macroeconomic policies have been caught up in the global financial market crisis. They need support, and the IMF is ready to give it,' he added.

Countries such as South Korea, Brazil and Mexico have seen liquidity dry up and their currencies weaken though measures of their broad economic health looked sound before the last few weeks, said Citigroup analysts Donald Hanna and Tania Reif in a report.

With the new facility, qualifying countries can borrow up to five times their quota - the amount each country contributes to the IMF - for three months.

One country close to home that could benefit from the new IMF facility is Indonesia, said Citigroup economist Sim Moh Siong. Under the IMF's terms, Indonesia could borrow about US$15.5 billion. 'That would be useful in coping with the level of money that's flowing out of Indonesia right now,' he said.

Suddenly, the IMF is again being seen as a source of relief for countries in distress.

'This represents a shift - less than a year ago, the IMF was looking to downsize its operations,' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. 'Their whole role is going to be looked at in a new light.'

But the speed at which the IMF's war chest of some US$250 billion is being depleted is already raising worries that it may need to raise more cash soon.

Some analysts say that the IMF has too little firepower to save all nations that could face trouble, with many of its richest members such as the US and the UK also the worst-hit by the financial crisis.

'The IMF does have substantial total lending capacity, but given the size of major emerging markets such as Brazil, India, Turkey and Indonesia, that may be insufficient should, improbably, some of the major emerging economies require assistance,' said Thomas Oliver, a credit analyst for London-based asset management firm Schroders, in a note.

The massive global deleveraging is now threatening entire economies, prompting the IMF to act.

'This is more trying to steady the currencies as opposed to propping up the banking systems,' said Mr Cohen.

The costs of seeking the fund's help for truly distressed countries - which would not qualify for loans under the latest facility - is already apparent in Iceland. On Tuesday, Iceland's central bank raised its main interest rate benchmark to 18 per cent - the highest in Europe - from 12 per cent.

The move, a condition of a US$2.1 billion IMF loan announced last Saturday, reversed a 3.5 per cent cut in interest rates announced by the central bank just two weeks earlier, and is likely to force Iceland's economy into a deep, painful recession, say economists.

Until this month, the IMF had made emergency loans just six times before - to the Philippines, Thailand, Indonesia and Korea in 1997 during the Asian financial crisis, to Turkey in 2001, and to Georgia earlier this year.

As at end-August, the IMF had US$201 billion in funds available for lending to its 185 member countries. It can also call on some US$53 billion in additional funds from selected members under existing borrowing arrangements.

The IMF's funds are contributed by its members mainly through quota payments, which are based broadly on each country's economic size.

'US$250 billion does seem a relatively modest amount, but for many of the Asian economies, we don't see them running into difficulties or requiring help from the IMF,' said Tai Hui, an economist at Standard Chartered Bank.

'So the facilities are at this point very much a reassurance - a gesture to show that there will be support if needed - but I don't think there's a need right now.'