By Win Thin
Here are some thoughts on reports of an expansion of IMF lending capacity. The most important thing to note is that this is not a done deal by any stretch, and should be seen simply as a statement of intent by the agency. The IMF reportedly wants to strike a deal at the February 25-26 meeting of G20 Finance Ministers in Mexico City. From the IMF website: “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.” Its one-year FCC stands at SDR252 bln ($385 bln) in Q1 2012.
How can the IMF boost its resources? Obama officials have made it clear that the US will not put up more money for the IMF. This reflects a consistent view that the euro zone has the resources internally to resolve the crisis and that it should not rely on the US to bail it out instead. G-20 also gave a similar response at the last summit in November, when it balked at contributing more to the IMF. As such, it is hard to see what will change the G-20 stance ahead of the February meeting. The fact that the IMF sees a need to increase its lending capacity to $1 trln due to greater potential financing needs implies that things are going to get worse before they get better. EM programs typically don’t use up so much of the IMF’s resources, so the $1 trln number suggests that the agency sees a probable borrowing program for either Spain, Italy, or both. This in itself makes it unlikely that the euro zone can contribute to the IMF on a meaningful basis.
That leaves EM, which has balked at writing a blank check to the IMF without some sort of large-scale quid pro quo. The most obvious deal would involve an increased EM voice in running the IMF, via another re-weighting of voting shares. DM has been very reluctant to do this, and only recently has the IMF agreed to very minor changes in voting shares. Before the 2006 annual meetings in Singapore, DM share was 60.6% and EM share was 39.4%. Several rounds of reform signal a move in those shares to 55.3% and 44.7%, respectively. However, they have not yet taken full effect since as of March 2011, the shares were 59.5% and 40.5%, respectively. Given the slow pace of movement, it is hard to see how EM can get its voting share increased by very much as part of a deal.
IMF Managing Director Lagarde has mentioned that other “options” are being looked at. We assume these would include leveraging existing resources and/or relying on more unorthodox contributions from central banks, rather than on governments. These options have been leaked in recent months, and the fact they need to be considered suggests that increased funding from the more traditional sources is seen as problematic or limited, even as the global backdrop is getting worse. The next IMF quarterly update of its World Economic Outlook is scheduled for release January 24. The last one from September 2011 saw significant markdowns in global growth forecasts to 4% for both 2011 and 2012. The World Bank just this week released a 2012 global growth forecast of 2.5%, down sharply from a 3.6% forecast back in June 2011.
Bottom line: We think markets are getting too bulled up on the IMF headlines today. As the saying goes, “Show me the money!” Until then, we remain skeptical that the IMF will be able to obtain the extra funding it desires. Even if the IMF does get the extra financing, will it make a material difference? IMF/EU programs for Greece, Ireland, and Portugal have not been able to halt the crisis.