February 25, 2009 / 9:26 AM / 11 years ago

Multinational lenders need more capital to fulfill

WASHINGTON (Reuters) - The international institutions whose role is to provide financial aid to countries in crisis lack sufficient resources to cope with the current credit crunch and there is a growing sense that organizations like the IMF, World Bank and regional development banks need more capital.

Borrowing by developing countries from the International Monetary Fund, World Bank, the Inter-American Development Bank, Asia Development Bank, and African Development Bank has risen sharply as the global financial crisis has deepened.

In the last few months, the IMF has doled out rescue packages to Iceland, Hungary, Latvia, Ukraine, Serbia and Belarus, Pakistan to the tune of $48 billion (33 billion pounds), and is in talks with Turkey on a new lending program.

Global economic conditions are deteriorating and the fear is that more emerging market countries will be caught in the downward economic spiral, especially if financing conditions worsen, making it difficult for big corporates in those countries to access funding.

Some of these institutions warned last week that capital will be insufficient the longer the crisis drags on, or if several large emerging market countries default on their debt.

“There’s going to be a true, massive problem of financing for developing countries in 2009,” IMF Managing Director Dominique Strauss-Kahn said last month, calling for a doubling of IMF resources to $500 billion.

The IMF’s current lending capacity is $250 billion, including a $100 billion loan from Japan.

While shareholder countries agree that the IMF, as the global lender of last resort, is the institution most in need of capital, who should contribute and how remains unclear.

“There is a growing sense that the general principle that we need to increase resources for the IMF, that is increasingly a consensus,” a senior British official told Reuters.

“There is still an ongoing debate on exactly how you do it, what precise mechanism you use at the IMF, and whether you create some new facility or temporary mechanism, or whether you try and do something more fundamental around quota reform,” the official added.

The IMF has proposed it be done through direct loans from member countries, which could get bogged down in legislative bureaucracy, or by the IMF issuing bonds to central banks, a move already slapped down by some European countries like Germany.

Another solution is to convince emerging market economies like China and oil-rich Gulf states to raise their contributions to the IMF in exchange for greater voting power.

So far China has been a reluctant participant in an institution it believes spends too much time lecturing developing countries on how to run their economies while ignoring bigger economies like the United States which let its economy run off the rails.


Meanwhile, Britain is pressing the World Bank, the globe’s poverty-fighting institution, to step up lending to developing countries beyond the $35 billion it has pledged this year, a significant increase from $13.5 billion last year.

But there are questions over how aggressive World Bank lending can get without jeopardizing its top AAA credit rating. Unlike the IMF, which relies solely on contributions from member countries for its resources, the World Bank also raises money from global capital markets.

Steven Hess, Vice President for credit rating agency, Moody’s Investors Service, said the World Bank could comfortably increase its lending this year but over the medium-term may require an increase in capital.

“If this crisis went on for a very long period of time and they were viewed as the only sources of lending for a lot of developing countries, then that might become an issue,” Hess said. “In 2009 this is not an issue they are going to confront,” he added.

“If they are planning ahead and their internal forecasts are for a huge increase in demand, they would have to start talking now to prepare governments for that possibility,” he added.

Still, the IMF and World Bank have not been immune from the global stock market meltdown of the past year. The World Bank’s private-sector lender, the International Finance Corp, last week reported total comprehensive income losses of $1.4 billion, the majority of which were unrealized equity investments. Net income loss was $539 million.

Similarly, the Inter-American Development Bank, which lends to countries in Latin America and the Caribbean, reported a $1 billion loss, mostly from unrealized investments that were recognized in compliance with mark-to-market accounting rules. Realized losses were around $71 million.

IADB President Luis Alberto Moreno told Reuters on Monday the loss would not affect the bank’s ability to lend but it was looking at ways to increase its resources.

Reporting by Lesley Wroughton

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