IMF Loans Total 41 8 Billion in November Busiest Month Ever

The International Monetary Fund this month lent more money to cash-strapped governments than it has in the past five years combined.

The IMF agreed this month to $41.8 billion in loans, approving $16.4 billion for Ukraine, $15.7 billion for Hungary, $2.1 billion for Iceland and $7.6 billion for Pakistan. Financing is in the works for Serbia, Turkey, Belarus and Latvia, turning eastern Europe into a regional ward of the IMF the way Southeast Asia was a decade ago.

Facing a decline in relevance and revenue just a year ago, the IMF under Managing Director Dominique Strauss-Kahn is getting a lift from the global credit crisis. Demand for its loans is rising in nations suffering from weaker export sales, banking industry turmoil and deteriorating investor confidence in the developing world.

“This has arguably been the busiest month in the IMF’s 62- year history,” said Simon Johnson, former IMF chief economist and now a senior fellow at the Peterson Institute for International Economics, in Washington. “It seems incredible that just six months ago the main shareholders of the fund -- the G-7 nations -- said the IMF was out of the lending business.”

IMF disbursements peaked at $26.6 billion in 2002, according to the fund’s records that date back to 1984. The Washington-based international lender was formed by world economic powers in the mid-1940s to create a pool of money for countries in crisis.

Brazil’s Record

The largest bailout in IMF history was the September 2002 approval of $30.4 billion for Brazil. South Korea got $21 billion in December 1997, in the midst of the Asian financial crisis of that year in which Indonesia received $11.2 billion and Thailand got $4 billion.

To handle the rush of new requests, the fund in late October approved a short-term lending program that almost doubles the amount developing countries are allowed to borrow. Eligible countries can draw 500 percent of their quota -- the amount they contribute to the IMF -- as many as three times in a 12-month period. The usual IMF loan is three to five years.

“They have gone from zero to 60 miles per hour with great speed,” said Jaime Valdivia, who manages $1 billion of assets for Emerging Sovereign Group in New York and is a former IMF economist. “I think several countries will eventually take advantage of their new liquidity facility, including South Africa, Indonesia, the Philippines. Romania is a candidate for loans and in the longer term so are Argentina and Ecuador.”

Japan’s Contribution

Japan earlier this month offered to lift the fund’s lending capacity to $300 billion, from $200 billion. British Prime Minister Gordon Brown has called on nations with large foreign exchange reserves, such as Saudi Arabia and China, to pledge resources to the IMF.

Developing countries turn to the IMF when private capital sources dry up. Trading in emerging-market debt plunged 43 percent in the third quarter to the lowest since 2003 as the global financial crisis choked off demand for higher-yielding securities.

Trading totaled $946 billion in the quarter, down from $1.67 trillion in the year-earlier period, the Emerging Markets Traders Association, or EMTA, said in a statement today.

The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries climbed in late- October to 8.65 percent, the highest in six years, according to JPMorgan Chase & Co.’s EMBI+ index.

A year ago, a newly appointed Strauss-Kahn faced annual losses of $400 million by 2010 if the IMF’s business didn’t improve and its staff of 2,600 wasn’t reduced. Strauss-Kahn, in a statement released a month after taking office in November 2007, said an overhaul of the IMF needed to address the “twin issues of the fund’s relevance and legitimacy.”

‘Lining Up’

International legitimacy no longer is a concern for the IMF, analysts said.

“More countries are going to keep lining up outside the IMF’s doors,” said Win Thin, emerging markets currency strategist at Brown Brothers Harriman & Co. “The longer this crisis goes on, the more countries that will be drawn in.”

The most vulnerable financially are in eastern Europe, including Bulgaria, Romania, Estonia and Lithuania, Thin said. Ecuador and Venezuela “appear to be heading toward a crisis but for political reasons will exhaust all other options before they go to the IMF,” he said.

According to Thin’s research, six countries in eastern Europe -- Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia -- have short-term debt of 100 percent or more of their reserves.

http://www.bloomberg.com/apps/news?pid=20601087&sid

Business Financial Services

IMF Loans Total 41 8 Billion in November Busiest Month Ever