EURO ZONE DILEMMA:AS EUROPE'S sovereign debt crisis threatens Italy and Spain, the International Monetary Fund, the euro zone authorities' partner in its rescue missions so far, is wondering whether getting more involved will risk its cash and credibility.
If the fund were to maintain the one-third share of financing it provided in the joint EU-IMF bailouts for Ireland and Portugal, Spain would be a stretch and Italy out of the question for its limited resources. However with the euro zone desperate for the credibility that some say the IMF can bring, the fund could take a leading role in enforcing conditions on the borrower countries while providing a shrinking share of the financing.
Ironically, Spain – and to some extent Italy – are much closer to the traditional candidates for IMF funding than Greece. With a relatively low ratio of debt to gross domestic product, Spain can argue that it is illiquid but solvent.
In theory, the fund could make a reasonable contribution to a financing package for Spain: rough estimates of a likely rescue loan for Spain are €200 billion- €300 billion and the IMF has about €280 billion of “forward commitment capacity” (FCL).
One possibility for Spain is the flexible credit line, a new IMF lending facility which can provide large sums quickly to generally well-run economies facing sudden balance of payments problems.
IMF staff are well disposed to Spain, where the government of José Luis Rodríguez Zapatero has put through difficult reforms. Informal rules governing the likely use of the FCL suggest the fund could lend Spain at least €45 billion.
Italy though is too big for the fund to make a serious contribution. In any case, some experts say, if Italy faces a funding crisis, the problem would have become a continent-wide conflagration.
“The IMF is equipped to support small to medium-sized economies,” says Domenico Lombardi of the Brookings Institution, and formerly Italy’s representative on the fund’s executive board.
“It cannot backstop the euro zone. That will have to be a job for the ECB.”
Any IMF involvement in Italy and Spain would be greeted with suspicion by some emerging market countries.
Paulo Nogueira Batista, the Brazilian representative at the IMF, last week said European shareholders were risking the fund’s finances and its credibility by dragging it into bailouts such as Greece with too a low probability of success.
Eswar Prasad, a former senior IMF official now at Cornell University, says the fund’s leverage in its dealings with the euro zone has shifted markedly since the first Greek bailout in May last year.
At that point, he says, the fund was still touting for business to prove its relevance. “These days Europe needs the IMF a lot more than the IMF needs Europe,” Prof Prasad says.
