Some Thoughts On The IMF And Europe

by Win Thin

Newswire story reporting increased US support for Europe does not have a lot of substance behind it, in our view.  If we are reading the comments correctly, the US official was simply saying that the US would back an extra commitment of funds from the IMF for Europe, not that the US would give more money to the IMF for use in supporting Europe.  As we have pointed out in the past, the IMF total contribution to the European rescue fund is not a solid one.  That is, the IMF responds to country-by-country requests for aid, not to regions.  Thus, the IMF really does not have EUR250 bln set aside just for Europe.  And the thinking goes that whatever the true number is, the IMF has enough funds to help Greece, Portugal, and Ireland but not enough to fund either of the bigger peripheral countries of Spain and Italy.  As a point of reference, Greece (GDP of $330 bln) received $39 bln from the IMF.  Ireland (GDP of $227 bln) and Portugal (GDP of $228 bln) are similarly sized, so perhaps total IMF aid could end up being around $115-120 bln for these three.  Spain (GDP of $1.46 trln) is almost twice the size of these three combined and so back of the envelope calculations suggest the need for a potential IMF package of over $225 bln for Spain alone.

IMF website notes that “The IMF keeps track of its future ability to lend by monitoring its one-year forward commitment capacity, which gives an indication of resources available for lending.”  We note that the IMF through August had a one-year forward commitment capacity (FCC) of $217.4 bln.  That’s not to say the IMF couldn’t come up with EUR250 bln ($327.5 bln) if asked, it’s just that the process would be a bit more cumbersome as it would necessitate the IMF having to tap some of its borrowing facilities in order to provide assistance since the pledged amount is well above its one-year FCC.  And politically speaking, can the US, Germany, and other countries justify giving more money to the IMF in the current environment?  It would be very difficult to push through, in our view.