G-20 Said to Weigh Boosting IMF Lending Power to Aid Europe

Nations from China to Brazil are considering increasing the International Monetary Fund’s lending resources to help stem the European debt crisis, Group of 20 and IMF officials said.

Policy makers are discussing an expansion of the IMF’s firepower as part of a global G-20 agreement next month in Cannes, France, according to three officials, who declined to be named because the discussions are not public. Talks are in preliminary stages as potential contributors wait to see what measures Europeans take to end the debt turmoil at an Oct. 23 summit, they said.

IMF Managing Director Christine Lagarde told member countries last month that her current $390 billion war chest may not suffice to meet all loan requests should the global economy worsen. Additional funds could be used to help shelter Italy and Spain with precautionary lending, the people said. Standard & Poor’s cut Spain’s credit rating by one level to AA- yesterday.

“Emerging markets, in particular China, may feel the pressure at this point to make some gestures to help the West,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “They do not want to invest too much given that the West’s problems are of its own making, and if they help, they want to do so in a way that brings them benefits and recognition.”
Spain Downgraded

The euro rose to $1.3809 as of 10:40 a.m. in London. The Stoxx Europe 600 Index climbed 0.9 percent and U.S. index futures also gained. Overnight, the MSCI Asia Pacific Index lost 1 percent after S&P downgraded Spain’s credit rating for the third time in three years as slowing growth and rising defaults threaten banks.

A move to bolster the IMF’s firepower would be similar to a G-20 decision in April 2009 to triple the fund’s resources as part of plan to pull the world out of recession. Emerging markets such as China and Brazil are among potential contributors, along with developed economies such as Japan, two of the people said.

“The crisis requires a stronger IMF, one that is well resourced, one that has more flexibility of its toolkit and one that has a stronger surveillance mandate,” Mexico Deputy Finance Minister Gerardo Rodriguez said in an interview with Bloomberg Television in Paris.
China’s ‘Open Attitude’

Chinese deputy finance minister Zhu Guangyao, meeting with G-20 counterparts and central bankers in Paris today, confirmed a proposal to increase global lending to Europe via the IMF is on the table. China “supports stability in Europe and holds an open attitude toward all discussions,” he said.

IMF spokesman William Murray declined to comment. The Financial Times reported earlier that emerging-market nations were considering ways to boost the IMF’s lending resources.

In Japan, the finance minister indicated a cautious stance on supplying funds. Asked at a Tokyo news conference today whether Japan would consider boosting its contribution to the IMF, Jun Azumi said, “at the present moment, is there a need for that?”

Azumi said Japan would want an explanation on what role the the IMF will play in dealing with the European crisis and why the extra money is needed, before considering further funding.
‘Delicate Issue’

“This reminds me of the 1980s when Japan increased shares in IMF and World Bank and emerged as a powerhouse,” said Tomo Kinoshita, a Hong Kong-based economist at Nomura Holdings Inc. (8604), Japan’s largest brokerage. “It’s a delicate issue,” because emerging nations don’t want a slump among major economies that may erode export growth, while they are also reluctant to spend more money to bail out Europe, he said.

As in 2009, additional resources may come through bilateral loans or by purchasing IMF notes rather than by an increase in its permanent resources, the officials said. One solution being considered is the creation of an IMF-run special purpose vehicle, two of them said.

“The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-case scenarios,” Lagarde said in an “action plan” distributed to the IMF steering committee Sept. 24. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”

The IMF can work “alongside” the European bailout fund to help restore confidence in Spain and Italy, Antonio Borges, the IMF’s European department aid, told reporters in Brussels this month.
BRIC Backing

Officials from Brazil, Russia, India, China and South Africa — the so-called BRICS — said in a Sept. 22 statement they are “open” to contributing to global financial stability through the IMF or other international financial institutions.

Brazilian Finance Minister Guido Mantega told reporters yesterday that strengthening the IMF is “the second most important issue we have to discuss” at a meeting with his G-20 counterparts in Paris this week.

“We are having bilateral discussions to see what is the best proposal,” he said. “There is no homogeneous position, but we are trying to reach a common proposal.”

The U.S. this week downplayed the IMF’s needs, with the Treasury Department’s top international official, Lael Brainard, calling its resources “ample.” The IMF is already playing an important role in Europe, she told reporters in Washington.
‘Heightened Risks’

S&P reduced Spain’s rating to AA-, the fourth highest investment grade, saying there are “heightened risks” to the nation’s growth prospects and that its banking system may weaken further.

French President Nicolas Sarkozy and German Chancellor Angela Merkel promised on Oct. 9 to recapitalize banks to resolve the debt crisis. debt crisis doesn’t spill over into the rest of the world.

“Europe has been behind the curve,” Gordhan told journalists in Paris today. “The time has come to demonstrate leadership and decisiveness to ensure contagion won’t impact the rest of the globe. We’re looking for assurance from our European colleagues.”