By Christopher Swann and Tasneem Brogger
Oct. 24 (Bloomberg) -- The International Monetary Fund is considering an emergency program to prevent a collapse of emerging markets by almost doubling borrowing limits for members and waiving its standard demands for economic austerity measures.
The fund is discussing plans to offer so-called hard- currency loans of three to six months, two IMF officials informed of the matter said. Separately, the Washington-based agency agreed today to lend Iceland $2.1 billion in accordance with existing rules after the island nation's banking system collapsed, threatening a prolonged economic contraction.
Managing Director Dominique Strauss-Kahn's proposal to give backstop funding to emerging markets represents an unprecedented effort by the IMF, which typically negotiates loans on a case- by-case basis and imposes policy conditions such as cutting spending or adjusting interest rates. The new plan echoes initiatives in the U.S. and Europe to provide funding to arrays of banks to avert a financial-system collapse.
``Strauss-Kahn wants to throw a lifeline to emerging markets,'' said Phil Suttle, director of economics at the Institute for International Finance in Washington, who used to work at the Bank of England. Like U.S. Treasury Secretary Henry Paulson, he is ``moving from ad-hoc responses to each crisis to a more general systemic response.''
Under the new program, countries would be able to borrow as much as 500 percent of their quota -- the capital they agree to contribute to the IMF, the officials said. Normally, they may borrow as much as three times their quota. The standard IMF loan term is three to five years.
Five Times Quotas
South Korea's IMF quota is $4.4 billion, meaning it could get as much as $21.8 billion under the program. Mexico might qualify for $23.5 billion, with $22.6 billion for Brazil and $10 billion for Poland.
Iceland today became the first western nation to seek aid from the IMF since the U.K. in 1976. The nation's economy will shrink as much as 10 percent next year, Paul Thomsen, head of the IMF delegation to Iceland, said at a press conference today.
The government took control of the island's three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf this month after they were unable to secure short-term funding. That precipitated the collapse of the krona, with the central bank attempting a currency peg, only to abandon the measure the following day.
The three banks together amassed debt worth $61 billion, equivalent to about 12 times the size of the economy.
Fed, ECB
Emerging-market central banks have been left out of agreements between the U.S. Federal Reserve and its European and Japanese counterparts to provide unlimited funds of dollars to stabilize money markets. The reverberation of the financial crisis through the global economy has driven the premiums on emerging-market government bonds to six-year highs.
``A short-term liquidity line from the IMF could really help developing countries and would put the fund right at the heart of efforts to solve the financial crisis,'' said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York.
Emerging-market currencies and bonds have also been hammered amid an investor exodus from riskier assets. The Polish zloty and Hungarian forint headed for their biggest weekly declines on record, while South Africa's rand extended its slump this year to 37 percent against the dollar.
Yield premiums on emerging-market dollar bonds over U.S. Treasuries swelled 22 basis points, or 0.22 percentage points, today to 8.79 percentage points, the widest since October 2002, according to JPMorgan Chase & Co.'s EMBI+ index. The spread has jumped 7.3 percentage points from a record low of 1.49 percentage points in June 2007.
Board Meeting
The fund is considering tight qualification criteria for the short-term financing program to ensure that it helps nations facing liquidity, rather than solvency, problems, one of the officials said.
Strauss-Kahn made the proposal two days ago at a meeting of the fund's 24-member executive board -- which represents the lender's 185 member countries, the officials said. Additional research on the plan may be available to the board as early as today, they added.
Demand for the fund's emergency loans -- which had dried up over the past five years as developing nations boomed -- is now soaring. Hungary, Ukraine, Belarus, Iceland and Pakistan have all announced this month that they are seeking financial support from the IMF.
$209 Billion
The fund has about $209 billion available to help emerging markets. Strauss-Kahn said earlier this month the IMF could raise more money if necessary by tapping agreements to borrow from industrial countries.
``The fund has the resources to be able to support the needs of our membership, Strauss-Kahn said in Washington Oct. 9 at the fund's annual meeting. ``If these resources were all used and there was a need to increase resources, we have a different way, we know a different procedure to increase the resources.''
The fund's resources could be supplemented by the world's major central banks, and Japan has indicated a willingness to participate, the officials said.
To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net; Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net
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