Published: November 11, 2008
The managing director of the IMF, Dominique Strauss-Kahn, has sent a letter to the G-20 heads of government and institutions, saying the IMF’s funds could be perceived as “inadequate” to deal with the global financial crisis, and calling on the G-20 to provide more money.
Strauss-Kahn wrote in a letter of November 9 that, although the Fund has so far bailed out the governments of both Hungary and Ukraine, and also put in place an emergency short-term liquidity facility, “there may be concerns in markets that the official resources needed to stabilize the situation are inadequate, which could exacerbates the problem as investors head for the exits”.
He added that the G20 summit being held on November 15 in Washington was “an opportunity to signal the international community's willingness to ensure that sufficient resources are available, be it through co-financing of IMF programs (as done in the case of Hungary) or increasing the Fund's loanable resources”.
The call for more funds comes a mere 10 months after Strauss-Kahn suggested the Fund should be “downsized”, and its expenditure cut by US$100mn.
Ousmene Mandeng, head of public sector investment advisory at Ashmore Investment Management, one of the largest emerging market managers in Europe, says: “The Fund has been quite slow to take a proactive role in this crisis, partly because it was in downsizing mode, so was thinking in a very different way.”
The IMF has reserves of US$200bn, but in the last few weeks has already provided over US$25bn in loans to Ukraine (US$16.5bn), Hungary (US$10bn), and Iceland (US$2bn), with further loans possible for Belarus and Pakistan. If a larger country needed a bail-out, such as Turkey or Brazil, it would quickly exhaust the IMF’s reserves, potentially leading to one or more sovereign defaults.
In early November, UK prime minister Gordon Brown went on a tour of the Gulf region, meeting with GCC heads of state and asking them to provide more funds for the IMF, potentially in return for a greater stake in the Fund’s equity.
At the moment, the shareholder structure of the Fund, as well as its senior management, is weighted towards the US and EU. Several countries, including France, Brazil and Turkey, have called for a new Fund shareholder and management structure that reflects the importance of emerging markets in the global economy.
Mandeng of Ashmore Investment Management says: “For all practical purposes, if the Fund really needed cash, it can get it, either via borrowing itself, or through bilateral agreements with funder countries like China or Saudi Arabia, perhaps in return for greater equity in the Fund. In the 1980s, the Fund received a capital boost from Saudi Arabia in return for Saudi Arabia receiving more equity in it.”