Tuesday 24 April 2018

IMF warns $1tn needed to fund more bailouts

World Bank warns of recession even larger than three years ago if countries cannot finance their debts on the bond market

Brendan Keenan Economics Editor

DEBT-LADEN countries may need $1 trillion (€800bn) over the next two years, the International Monetary Fund (IMF) calculates, as it seeks to increase its financial rescue power.

The IMF said it would ask member states to contribute $500bn to help the fund provide for future bailouts.

Eurozone countries may have to provide the bulk of an extra $300bn, alongside the $200bn already agreed in principle, as the US is reluctant to add to its contribution.

Reports say the funding would not be the normal contribution from all member states according to size, but voluntary pledges. This would avoid the anomaly of countries already in IMF bailouts, like Ireland, Greece and Portugal, having to offer money to the fund.

The move comes as the IMF's sister organisation, the World Bank, produced a gloomy assessment of the risks from the current crisis.

The bank specialises in funding developing economies and its chief economist warned them to be ready for another 2008-style collapse.

"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," said Justin Lin.

"The risk is of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains," the bank said in its twice-yearly Global Economic Prospects.

If more eurozone countries find they cannot finance their debts on the bond markets, "the world could be thrown in a recession as large or even larger than that of 2008/09," the bank warned.

It acknowledged that the situation had stabilised recently and there were signs of further progress yesterday. As well as a comfortable bond sale by IMF-supported Portugal, there were signs of an agreement between Greece and its lenders over the losses they should face.

"Taking into account the complexity of the exercise, I would say that we are very close to reaching an agreement," Greek prime minister Lucas Papademos said.

Reports say the private sector lenders are facing a loss of more than 60pc on their bonds. They will swap their bonds for new ones, repayable in 30 years time. But the interest paid will be so low, at 2pc-3pc, that the value of the bonds will be much less than the existing ones.

Agreement will allow Greece access to another €130bn in EU/IMF funds. Without it, the country would face defaulting on its debt in March, when €14bn is due for repayment, possibly provoking the kind of crisis outlined by the World Bank.

The IMF is thought to be seeking more finance because of the prospect of extended bailouts for Greece, Ireland and Portugal, and the possibility of assistance for Italy and Spain.

After a meeting of the IMF board which represents the IMF's shareholder countries, managing director Christine Lagarde said: "I welcome the recognition of the importance of ensuring adequate fund firepower to help defuse the current global economic weaknesses and regional challenges.

"To this end, fund management and staff will explore options for increasing the fund's firepower, subject to adequate safeguards."

Yesterday, an IMF spokesman said: "At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations with the fund's membership have been completed."

The IMF currently has almost $400bn to call upon. Under the rules, countries would have to pledge $600bn to provide $500bn in usable funds. These commitments do not usually appear on national budgets, but UK Prime Minister David Cameron already faces opposition to any increase in its share.

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