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Saturday, 25 October 2014

A private issue

Private bondholders won't make the IMF better

The International Monetary Fund thinks it needs more money, again. But proposals to let it tap private investors by issuing bonds look desperate. It could use extra cash to aid the euro crisis, but new funding of this type might delay restructuring of European national finances. It could also give the fund too much firepower; and risk leaving it beholden to fickle market sentiment.

To date, the IMF has got its money directly from the central banks of member governments, mostly the rich ones and, above all, from the United States. Since the 2008 financial crisis the IMF has tripled the resources at its disposal to around $750 billion. But a good chunk of the fund’s money has already been committed, leaving the IMF with about $400 billion unlent and at hand. This falls short of the $840 billion the fund reckons it might need to help rescue Europe in the worst-case scenario.

Allowing the IMF to raise further capital by issuing bonds to private investors is, therefore, worthy of consideration. With triple-A issuers becoming an endangered species, bond investors may well respond warmly to IMF bonds. The IMF would not be blazing an entirely new trail by resorting to private markets. The World Bank has accessed the bond markets since it was set up in 1947.

But the addition of another line of emergency funds to stand alongside the European Financial Stability Facility might lead to further euro procrastination. Some nations – including Germany – have long feared that an over-mighty IMF would raise moral hazard problems. It might lend too much to irresponsible nations.

Investors are sure to fret that chunky IMF issuance now might be tainted by euro woes. As well as slowing the process it might add to the costs. Governments, meanwhile, would hardly escape financial burdens since they would be standing behind the IMF bonds.

Looking to the market in this way would entrench, rather than relieve, exposure to fickle swings in sentiment. If the IMF needs extra money – which may be the case – it would be safer to get it from tried and tested sources.

Context News

The International Monetary Fund is considering proposals to boost its borrowing capacity by issuing debt to private investors. Throughout its 60-year history the IMF has relied for funding on borrowing directly from member governments.

The IMF’s sister institution, the World Bank, has issued debt privately since its foundation in 1947. An IMF staff study seen by Reuters suggests that the IMF may face demands for $840 billion in a worst-case scenario if the European crisis deteriorates.

Full approval of previously agreed lending agreements and increases in quotas would boost the IMF’s lending capacity to around $755 billion – three times its level before the 2008 financial crisis.

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