August 31, 2010 / 2:12 AM / 8 years ago

IMF launches lending plan aimed at averting crises

WASHINGTON (Reuters) - The International Monetary Fund announced a new credit line on Monday designed to serve as a crisis insurance policy for pre-qualified countries that do not immediately need an emergency loan.

An employee of an money exchange counts U.S. dollar bills in Tokyo November 27, 2009. REUTERS/Yuriko Nakao/Files

The precautionary credit line is for countries that have sound economic fundamentals and policies but may not qualify for the more stringent flexible credit line, which was introduced in 2009, the IMF said.

Only three countries — Mexico, Poland and Colombia — have established flexible credit lines so far, although they have not drawn on the resources. The IMF’s executive board agreed on Monday to amend that program by doubling the duration to up to two years and increasing the amount of credit available.

Under the new precautionary credit line, the IMF said any of its 187 member countries could request access and the board would decide on a case-by-case basis which ones qualify.

Countries will be assessed against five broad areas, including fiscal and monetary policy and the health of their financial sector. Unlike the more rigorous qualification process for the flexible line, countries can win approval even if they fall a bit short in one or two categories.

A senior IMF official declined to comment on how many countries might qualify or whether the program was intended for any particular country or region.

“We expect that the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system,” IMF Managing Director Dominique Strauss-Kahn said in a statement.

The recent financial crisis showed that credit can suddenly freeze up in times of market upheaval. Even some countries that were far removed from the U.S. mortgage mess had difficulty accessing credit markets at the height of the financial panic.

Borrowing from the IMF often carries a stigma, however, and countries may be reluctant to ask for help because emergency loans come with tough conditions that are often politically unpopular and can be socially painful.

The IMF has been looking for ways to reduce that stigma. The hope is that by pre-qualifying countries, investors will see these credit lines as a sign of financial and economic strength rather than weakness.

WHO WANTS IN?

However, questions exist as to whether many countries would sign up for the new credit option, considering only three had accessed the flexible credit line.

A draft document obtained by Reuters, outlining European Union positions for an upcoming Group of 20 planning session, suggests some skepticism over the new program.

“The EU remains to be convinced of the desirability of establishing a precautionary credit line,” said the document, which was undated. It was not clear whether European officials had approved the draft document.

The draft said existing IMF standby loan arrangements had worked well during the latest crisis, and introducing a new credit line now might create “unwanted segregation” among member countries.

“Against this background, a PCL facility at this stage may not be needed,” the document said.

John Lipsky, the IMF’s deputy managing director, said the Fund’s member countries had “overwhelmingly” supported creation of the new lending program and he was confident that it would be well received.

He said the three countries that used the flexible credit line had renewed their agreements and investors had taken it as a good sign that these countries had qualified.

“If there’s an IMF stigma, it’s a positive stigma,” he said on a conference call with reporters. “Those countries that qualify for the (flexible credit line) have been rewarded in terms of investor attitudes.

“I feel confident that if market circumstances were to turn more difficult, it’s quite plausible that other countries that would qualify would choose to use” the credit lines, he added.

(Editing by Dan Grebler)

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