IMF On Lending Spree - Needs $150B, At Least

At one point late last year, the International Monetary Fund had $250 billion to make emergency loans to countries on the brink of collapse. That $250 billion pool is depleting fast, and a few hundred billion dollars more are needed during the course of 2009. Without those additional funds, a number of developing-world economies will not get the aid they will inevitably demand and hundreds of anti-poverty initiatives will have to be shelved

On Monday, IMF Managing Director Dominic Strauss-Kahn warned that the deepening global recession will cause an increasing number of third- and fourth-world nations to seek monetary assistance; so cash-rich nations must find ways to boost the IMF’s disbursable budget by another $150 billion. But if the potential bailout line-up is any guide, that $150 billion number appears highly conservative and, in fact, entirely out of tune with the times.

Already, between Hungary, Ukraine, Latvia, Belarus, Pakistan and Iceland, the IMF is on the hook for US$55 billion. Turkey (unemployment at 12%, November industrial output down 15%) is negotiating with the IMF for a $25 billion facility, though it has $50 billion in foreign loans coming due this year. As internal economic conditions deteriorate, at least six former Soviet satellites, in the Baltics and South-Eastern Europe, are expected to ask the IMF for a total amount in excess of $70 billion. Then there is the issue of the viability, in the present climate, of the IMF’s outstanding lending arrangements with countries in Latin America, Asia and Africa. And the real possibility that the recently-concluded packages (with Pakistan, for instance) will need to be topped up in the second half of 2009.

Besides keeping a watchful eye on the erosion of asset valuations and consumer demand, investors with long positions in emerging-market exchange-traded Funds (ADRE, EEM, FRN, PXH, PXR) should also take note of the fact that, in the absence of a substantial enhancement in its lending capacity, the IMF will be forced to decline (or defer) bailout requests (under its Exogenous Shocks Facility program) from nearly three dozen countries. The IMF, in turn, is hoping that wealthy nations will contribute well beyond pre-set quota requirements; but, considering that most of the industrialized nations are confronting historical bailout challenges of their own, it is not clear how and when the $150 billion-plus target is going to be achieved.

Early last November, British Prime Minister Gordon Brown visited the Middle East to persuade the oil-rich Arab states to contribute $200-300 billion to enable the IMF to help those economies which are likely to be hit hardest by this extended global slump. Shortly thereafter, the drop in oil prices triggered a credit crisis right across the region; sources inside the IMF conceded that they have lost hope of receiving any funds from the Gulf in the foreseeable future. China and Russia, with foreign currency reserves of $1.9 trillion and $480 billion respectively, are too busy trying to stimulate their own economies to be worried about the IMF’s balance sheet.

Not that the IMF’s “conditionality guidelines” are doing much for the health of the economies receiving emergency assistance. As in the case of the Latvia rescue (article posted by this writer on Seeking Alpha, January 8, 2009), the IMF continues to impose or agree to terms which are usually unrealistic and often counterproductive. “The IMF’s policies in Latin America have proven to be total failures,” said a senior Argentinean finance ministry official after her government announced plans to takeover public pension funds three months ago. “The IMF’s free-market and privatization agendas have led Argentina and this continent to ruin.”

The IMF cannot cite one example of a “growth” economy which has successfully implemented sustainable internal structural changes (to reduce poverty and to improve living standards) pursuant to the receipt of loan funds. In today’s circumstances, that fact alone will make it extremely difficult for it to remain solvent within the context of its role as the lender of last resort for the emerging markets. As one IMF economist fears, “contributions to our budget will, at best, come in dribs and drabs, with little emphasis on urgency, thus defeating the purpose.”

Disclosure: Author holds short positions in ADRE, EEM

Comments

[Trading to Win:]

Rakesh,

A few smart cookies in the UK think that the UK will end needing an IMF bailout. What are your thoughts on this happening?

Jan 13 10:26 AM

[Sunty:]

With the Gulf, CHina, Russia et al focused on themselves and US with its own set of gargantuan economic problems, from where do the UK smart cookies think the funding for a UK-sized bailout will be made available to the IMF??

Jan 15 10:02 AM

[Trading to Win:]

Sunty,

Spot-on.

The UK could become an Undeveloping Nation, a al Argentina.

Jan 15 12:21 PM

[Rakesh Saxena:]

Dear Debt Junkie: The UK economy is the most vulnerable economy at this point. Whether the UK government admits it or not, tourism (i.e. London) and "non-industrial" foreign investments (i.e. prizes like the soccer clubs) are both key for jobs. And the UK "buy-to-let" basement suite market is now in tatters. But re the IMF bailout, I'm not sure if the IMF will have the money for too many more bailouts--the numbers just don't add up. As a sign of the times, Instead of heeding Gordon Brown's call to contribute to the IMF kitty, one Gulf semi-sovereign investor is willing to pay $100 million for AC Milan's Kaka!! Many thanks - Rakesh


On Jan 13 10:26 AM Debt Junkie Scum wrote:

> Rakesh,
>
> A few smart cookies in the UK think that the UK will end needing
> an IMF bailout. What are your thoughts on this happening?

Jan 15 01:05 PM