September 25, 2011 / 12:21 AM / in 6 years

IMF to mull expansion of crisis-fighting capacity

WASHINGTON (Reuters) - The International Monetary Fund said on Saturday it would decide by April whether its resources are sufficient to prevent a global credit crunch if Europe’s debt crisis spreads to the rest of the world.

Global finance ministers questioned whether the IMF had sufficient capital to provide a safety net to troubled countries in the event the crisis widened from Greece, Ireland and Portugal into larger European states and beyond.

“(IMF) financial resources may not be adequate to meet the potential needs of the crisis-hit countries,” Chinese central bank chief Zhou Xiaochuan told the IMF’s steering committee.

A communique by the committee called on advanced economies to act decisively to tackle dangers confronting the global economy. It also said reviewing the adequacy of the IMF’s resources would be part of ensuring an “orderly resolution” of the current crisis and preventing future ones.

IMF Managing Director Christine Lagarde sought to reassure countries that the Fund could at present fulfill its lending obligations.

However, she added that its current lending capacity of $400 billion “pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”

The IMF could comfortably commit to lending about $390 billion without putting its balance sheet at risk, but in a worst-case scenario it might need to lend about $840 billion, according to an internal document obtained by Reuters earlier this month.

Lagarde said the IMF’s credibility and its effectiveness depended on maintaining the confidence of both its member nations and the public in its ability to be a lender of last resort when troubles spread.

“As far as the IMF is concerned, it is ready and it will deliver on any type of resources necessary and available to all its members,” she told a news conference at the end of the IMF’s semi-annual meetings.

Many countries worry the IMF may have over-extended itself with generous loans to troubled countries such as Greece, Ireland and Portugal under its former managing director, Dominique Strauss-Kahn.

Lagarde said the IMF would also take a closer look at its lending instruments and whether it needed new lending tools to help countries withstand the effects of the crisis.

Emerging economies have called for the IMF to develop a short-term liquidity facility, similar to a currency swap line, which countries could draw on quickly in case global credit markets seize up.

French Finance Minister Francois Baroin said it was important that the IMF have sufficient firepower to tackle crises and said it should keep an emergency fund -- the New Arrangements to Borrow -- permanently activated.

“The ad hoc (liquidity) measures implemented during the last crisis should be supplemented with more permanent mechanisms and instruments and ones that could be implemented very quickly,” he told reporters.

World Bank President Robert Zoellick said failure by Europe and the United States to tackle problems in their economies “may shake the entire global economy,” throwing developing countries, which are driving global growth, off track.

“The numbers emerging out of developing countries over the past month, even the past week, are shaking and shaky,” he told reporters at the end of weekend meetings of the IMF and World Bank. (Editing by Tim Ahmann)

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