Cash in the attic, IMF edition | FT Alphaville

Cash in the attic, IMF edition

Fortifications at the ready! Given Merkel’s nein, Draghi’s pff and China’s err no to commit yet-more capital to the EFSF by process of elimination the only option left is…… the IMF.

Why not just beef up the policy lender to prop up the eurozone currency countries.

Writing in Emerging Markets, monetary economics wonk Barry Eichengreen makes the following call: (Emphasis ours)

The BRICs and other interested parties might contribute to a trust fund overseen by the IMF’s Executive Board, for example, to lend directly to the EFSF’s special purpose vehicle. Better, however, would be for the IMF to lend directly to Italy by extending it a precautionary credit line (PCL). This would halve the Italian government’s borrowing costs and give it time to convince the markets of its reform-mindedness. The PCL is for countries with a track record of sound policies but significant vulnerabilities. Italy has balanced its budget. Its leaders and Europe’s believe that it is solvent. But it now needs to put reforms in place in order to grow its economy. What more appropriate focus for the IMF’s “focused conditionality?”

So a precautionary credit line — not a flexible credit line. The former has more stringent requirements than flexbile credit lines so it’s presumably a recognition of the declining creditworthiness of Repubblica Italiana.

Update: it seems that on Friday the G20 will announce an expansion/reform of the existing precautionary credit line facility as well as a second SDR special allocation.

In theory, a precautionary credit line would provide Italy with a larger amount of resources than under a typical IMF stand-by arrangement and thus, boost market confidence about its access to cash.

That means it would not necessarily have to undertake the large-scale policy adjustments — i.e. shed budgets, cut pensions, drown puppies.. — normally associated with traditional Fund-supported programs. This mechanism already exists but it only exists in theory; there is no precedent of any large sovereign accessing it.

The PIIGS benefit from a credit line already in the sense that the EFSF lends to sovereigns and the ECB monetizes by rediscounting sovereign bonds to banks to boost private demand. But that’s not working, as the market fears a solvency crisis, not one of liquidity.

In any case, support from Bric nations and others to increase the Fund’s capitalisation seems to be building. Again, here’s Eichengreen’s take:

This one operation [providing a PCL to Italy ] would immediately tie up about a quarter of the IMF’s remaining resources. More funding for the institution is therefore essential. When the idea of the BRIC countries providing it was mooted last month, the United States and other advanced countries put the kibosh on the idea. If their motive was to increase the pressure on the Europeans to solve their own problems without outside help, then the stratagem failed. It is time to acknowledge that failure and move on.

IMF intervention is now the only alternative left for solving the crisis. Only the G20 can put the Fund in the driver’s seat and give it the resources it needs to complete the task.

In short, the IMF is broke – if it lends to Italy right now. The Fund’s forward commitment capacity – its stated non-concessional firepower taking into account actual and contingent liabilities and new arrangements to borrow – was $395.8bn, as of end-August.

That will barely make a dent in the rich man’s debt burden.

In any case, most analysts reckon the IMF will — and should — only play a consultancy role in the eurozone debt saga. “The IMF should be the McKinsey in all this since the solution lies with ECB,” Eduardo Levy Yeyati, econ professor at Argentina’s Universidad Torcuato Di Tella (UTDT), tells us.

So Eichengreen’s proposal prompts Alphaville to ask the following question: perhaps the IMF could channel a credit line through the ECB which could then on-lend in some sort of policy fudge?

Related links:
Kicking the Can(nes) – FT Alphaville
The Eurozone Crisis and Implications for the United States – Brookings
Approaching the Italian endgame – FT Alphaville