United States and other countries are having sleepless nights over prospects that troubled eurozone economies like Italy and Spain might knock IMF’s door for bailouts and rescue packages.
US officials said last weekend the International Monetary Fund cannot be expected to extend its support to ailing European economies, emphasising that a stronger commitment between European nations can help counter emergency situations.
IMF’s record has been stable since its establishment in 1944 as no borrowing country has ever defaulted on its loan or ever lost money lending to the financial institution.
However, concerns about the IMF’s growing exposure to the euro zone are on the rise, especially in a situation where Italy and Spain are weighing bailouts that would definitely dwarf rescue packages given to Greece, Ireland and Portugal during the last few months.
Emerging markets like China, India and Brasil are willing to lend more to the IMF but are wary about the risks to the fund’s capital and already fear more bailouts will overstretch its limited resources.
Last week’s European Union summit failed to take the troubled eurozone out of its current crisis that started when Greece almost defaulted two years ago. Since then, contagion has spread to other European countries like Ireland and Portugal. Once powerful European economies like Italy and Spain are also struggling badly to pay high interest rates on their sovereign debts and retain their coveted credit ratings.
Worries are also brewing among the US lawmakers across the Atlantic with many congressmen expressing unease over IMF’s growing role in eurozone crisis. Analysts believe United States will be caught in an awkward position if ailing European economies like Italy and Spain extend their hands for a bailout and might be tempted to veto the request.
With re-election year looming and US President Barack Obama under fire from all directions, observers believe the White House is not acting as a eurozone saviour and has several times urged the Europeans to use their own money for any bailout.
Officials at the IMF have expressed their unease at a recent Republican legislation attempt to yank a $108 billion American loan extended to the IMF in 2009.
“If the United States wants to help Europe to find a way out of its current debt crisis, we must be a strong, world economic leader, not merely the lender of last resort,” The Wall Street Journal quoted Republican Senator Jim DeMint as saying last week.
“Members of the Obama administration must focus all of their efforts on strengthening the US economy and balancing our budget, rather than on continuing to borrow from China to pay for Europe’s out-of-control debts,” he added.
Despite losing a Senate vote on repealing IMF loan authority 55-44, DeMint insists he would seek another vote to stop US Treasury Secretary Timothy Geithner from supporting more European bailouts.
Former IMF officials suggest such moves by US Republican party lawmakers will not restrict IMF’s ability to lend more money to Europe while pointing out that it is in the interests of the international community to stem the tide of eurozone contagion.
TOO BIG TO SAVE?
The IMF is currently operating with a lending budget of $380 billion, a figure that will easily be gobbled by Italy and Spain’s debt refinancing needs. Rome needs at least $450 billion in debt next year while Madrid could seek $159.13 billion to refinance its loans.
“The problem with some of these countries now is you’re getting to a point where (debt) is large enough that defaulting on the IMF is attractive enough if you want to reduce your debt,” Raghuram Rajan, a former IMF chief economist now at the University of Chicago’s Booth School, told Reuters.
“I’m not saying the euro area will act at cross purposes with the fund. But when it comes to writing down the debt, will the euro area respect the (preferred) status of the IMF?” he added.
Last week’s summit also made European leaders to agree on a $199 billion loan tranche to the IMF to help tackle the crisis. Leaders from non-European countries have also promised to lend $66.30 billion to the fund.
(Written by Moign Khawaja with input from Reuters)