A fresh (IMF) sovereign contingent liability | FT Alphaville

A fresh (IMF) sovereign contingent liability

Here’s a story that seems to have sneaked past undetected last Friday (albeit understandably).

It’s the final ratification of the IMF’s New Borrowing Arrangements (NAB) deal, complete with fresh details of exactly who is participating and on what terms.

And if you’re wondering why no one was trumpeting the details, the press release kind of explains why:

A ten-fold expansion of the International Monetary Fund’s New Arrangements to Borrow (NAB) took effect today together with reforms to make the NAB a more flexible and effective tool of crisis management. The expansion of the NAB was approved by the IMF on April 12, 2010 (see Press Release No. 10/145), and became effective following completion of the ratification process by NAB participants.

The reforms increase the NAB from SDR 34 billion (about US$[53] billion]) to SDR 367.5 billion (about US$[576] billion) once all new participants have adhered to the expanded NAB, giving a major boost to the resources available for the International Monetary Fund (IMF) to lend to its members.

The NAB reform process began in response to the call by the leaders of the Group of 20 (G-20) economies at its April 2009 London summit, endorsed by the International Monetary and Financial Committee (IMFC), to increase the financing available to the Fund, through an expanded and more flexible NAB increased by up to US$500 billion. Thirteen new participants, including a number of major emerging market economies, have joined 26 participants in the previous NAB or are in the process of completing their domestic processes for adherence.

The background

The NAB is the IMF’s principal standing set of credit lines under which 39 members or their institutions are committed to provide supplementary resources to the IMF when these are needed to forestall or cope with a threat to the international monetary system.

The NAB is supplementary to quota resources, which are made up of the quota subscriptions each country pays upon joining the Fund, broadly based on its relative size in the world economy. Under the 2008 quota and voice reform that became effective on March 3, 2011 (see Press Release No. 11/64), approved quotas of IMF members total SDR 238.3 billion (about US$[374] billion) and will rise to approximately SDR 476.8 billion (about US$747 billion) once the quota increase under the 14th General Review of Quotas agreed in late 2010 comes into effect—which is planned to be achieved by the Annual Meetings in late 2012.

When the quota increase comes into effect, it is agreed that the NAB will be correspondingly scaled back, with details to be determined during the review of the NAB to be completed by mid-November 2011. The recent unprecedented shock confronting the global economy led to a sharp increase in the demand for IMF financing. To ensure that the IMF continues to have sufficient resources to meet demand, leaders of the G-20 agreed in April 2009 that immediate financing from members of US$250 billion under bilateral borrowing agreements would subsequently be folded into an expanded and more flexible NAB, increased by up to $500 billion. This call was endorsed by the IMFC. Pending the effectiveness of the expanded NAB, member countries have pledged more than $300 billion in immediate bilateral financing.


In one sentence: A fresh sovereign contingent liability for one and all nations involved — which, given the fact that 12 out of the 33 participants consented thus far are European Union members is hardly what some of them (Spain and Portugal in particular) might need right now:

Curiously missing also is Poland, the self-proclaimed solitary “GDP survivor of Europe“. Readers may recall that Poland’s former central bank president Sławomir Skrzypek  (recently deceased) was particularly keen to join the lending consortium, while Poland’s finance minister was strongly opposed.

Flash forward to 2011, and the ratification comes at an intriguing time for both pressures on the IMF’s basic funding, the General Resources Account, and wider issues of funding supranationals with limited sovereign cash.

Here’s a favourite chart of ours to explain. Irish and Greek borrowing needs from the IMF are well ahead of their quota contributions:


Ireland, meanwhile — which had been slated to contribute €2bn to the framework — is also (unsurprisingly) gone from the consented participant list.

Although, for the real then and now impact, it’s best to compare and contrast with the original 39-member list of would-be participants as published in November, 2009.

We’ve bolded the ones which have either dropped out or are yet to consent:

Meeting of Current and Potential NAB Participants November 24, 2009:

Banco Central de Chile
Banco de Mexico
Deutsche Bundesbank
Hong Kong Monetary Authority
New Zealand
Saudi Arabia
South Africa
Sveriges Riksbank
Swiss National Bank
United Kingdom
United States

— By Izabella Kaminska and Joseph Cotterill

Related links:

IMF squabbles, Polish edition – FT Alphaville
Getting the IMF to take the heat — and sell its gold? – FT Alphaville
G20: Discussing the shape of international reserves to come – FT Alphaville