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Turkey is reported to be in negotiations with the International Monetary Fund for a $40 billion loan. Very shortly, the Baltic States and at least a dozen developing countries will be filing for IMF handouts. But how will the venerable lender of last resort fund itself?

According to a fact sheet posted on its website in October, the IMF had $200 million available for emergency loans to the third-world, and another $50 billion in “additional resources”. But the IMF’s liquidity is rapidly dwindling. Between the crisis facilities concluded with Ukraine, Hungary, Serbia, Iceland and Pakistan, and the expected spate of new loan requests, the IMF should be running out of money within the first quarter of next year. Quite simply, unless the rich nations (including American tax-payers) can add to the IMF’s funding capabilities, the global recession will cause unprecedented havoc, chaos, hunger and turmoil in the world’s poverty pockets.

The IMF tracks the credit default swap market very closely, and one can only hope that somebody in authority is reading the signals. CDS spreads (5-years) for Russia (950 basis points), Romania (700 bps), Bulgaria (625 bps), Latvia (1030 bps), Lithuania (650 bps), Estonia (600 bps), India (475 bps), South Africa (520 bps) and Brazil (415 bps) are already suggesting more forthcoming IMF bailout applications, not to mention the continent of Africa and the troubled Latin American debt matrix. By conservative estimates, the IMF may be called upon for $700 billion (remarkably akin to the Wall Street bailout amount) during the course of 2009. Will it get the money in time? And, from where?

Latin American leaders like Hugo Chavez (Venezuela), Daniel Ortega (Nicaragua), Evo Morales (Bolivia) and Rafael Correa (Ecuador) periodically claim that the economic and fiscal conditions imposed on borrowers by the IMF ever since the early 1980s are themselves the root cause of the current recession in the emerging economies. President Correa, whose audit committee has just declared that $10 billion worth of Ecuador’s foreign debt is “illegitimate and illegal”, has cited the IMF’s willingness to provide funds to dictators, despots and plainly corrupt governments as being another significant factor which has enabled the continuation of high poverty levels and which has created major dislocations in the “natural” economies (i.e. traditional self-sufficient structures in the agrarian sectors).

But, regardless of the strong opinions of those presumably involved in Bolivarian revolutions, sovereign bailout candidates obviously have little choice but to cut spending, privatize infrastructure, implement unworkable currency baskets and adopt free trade policies. That is, as long as they get the funds requested.

British Prime Minister Gordon Brown, foreseeing that the IMF could become technically bankrupt in short order, has asked Saudi Arabia for assistance. And, for all material purposes, Saudi Arabia is perhaps the only country which might be able to afford tens of billions of dollars to boost the IMF balance sheet. Unless, of course, traditional IMF lenders (the G7), who are already incurring huge deficits on the domestic front, decide that they cannot risk a bankrupt IMF bankrupting, in turn, 50-odd sovereigns, and thousands of corporations operating under those sovereign umbrellas.

While the IMF is sorting out its near-term viability, CDS spreads for emerging market sovereigns will continue to widen, with spreads for Eastern Europe (Baltics in particular) rapidly approaching default territory within December. So check your mutual fund investments to see if your asset manager has been buying Eastern Europe shares and bonds in recent months.

Disclosure: Author holds short positions in EEM, GUR

Source: IMF Needs Its Own Rescue Package Now