IMF Speeds Access to Funds as Emerging Markets Buckle

By Christopher Swann

Oct. 10 (Bloomberg) -- The International Monetary Fund will use a ``rapid-fire'' emergency-loan program to lend hundreds of billions of dollars to emerging markets as the credit squeeze threatens to hobble nations that until this year were weaning themselves off the fund's aid.

Dominique Strauss-Kahn, the IMF's managing director, said yesterday he has activated the program, which could distribute a record amount of cash. The move comes as the cost of protecting bonds issued by a number of developing countries has climbed sharply, and nations such as Brazil, Mexico and Peru have sold dollars to shore up their currencies.

The financial turmoil may restore the Washington-based lender to a central role in the global economy. Demand for IMF assistance has collapsed in the past few years as buoyant capital markets and rising commodity prices allowed many developing nations to raise funds on their own and build up currency reserves. Now central banks around the world are drawing on those reserves as the credit crisis spreads.

``The IMF had been written off as increasingly irrelevant,'' said Claudio Loser, a scholar at Inter-American Dialogue, a policy-analysis center in Washington, and former director of the IMF's Western Hemisphere department. ``Now we could see a renaissance at the fund. Countries that had hoped never to need the fund again may be forced to ask for help as the normal sources of finance dry up.''

Less Burdensome

Strauss-Kahn, 59, announced the plan on the eve of the fund's annual meeting this weekend in Washington. The program will allow the fund's 184 member nations to get loans in 10 days or less, rather than the usual several weeks it takes to process requests. Conditions the fund typically requires, such as cutting government spending, will also be less burdensome.

The IMF had $110.2 billion in outstanding loans at its peak as of Dec. 31, 2003. That had fallen to $17 billion as of September 30.

``The fund did not lend a lot during the last five or six years,'' Strauss-Kahn said. ``We have hundreds of billions of dollars which are likely to be used in one year, and even more if we go over this period.''

Stocks tumbled today, driving the MSCI World Index to its worst week in more than three decades. The index lost 3.7 percent to 922.27 at 12:23 p.m. in London.

Russian stock exchanges delayed the opening of trading today and Indonesia extended a two-day halt. Iceland yesterday suspended equity trading today until Oct. 13 after the government seized Kaupthing hf, the country's biggest bank.

Iceland `Option'

Iceland's Prime Minister Geir Haarde said Oct. 8 an IMF loan is ``definitely an option,'' and a mission from the fund was on the island yesterday. The government has taken control of the country's three biggest banks after they collapsed under the weight of debt.

Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, said in an Oct. 7 report that Eastern European nations are among the most at risk, because of large current-account deficits and high levels of external debt.

Estonia's current-account deficit -- the broadest measure of trade because it includes transfer payments and investment income -- is equal to 16 percent of the country's $28.6 billion gross domestic product. Its short-term debt is $10 billion, more than twice its $4 billion in foreign-exchange reserves, according to data compiled by Brown Brothers Harriman.

Bulgarian Debt

The data show Bulgaria's $14 billion in short-term debt equals three-quarters of foreign-exchange reserves, and its $12 billion current-account deficit is 25 percent of GDP.

Brazil sold dollars this week for the first time in five years, and Mexico sold $2.5 billion in the spot market Oct. 8 and 9, helping their currencies pare losses. Last month, Peru's central bank was forced to pour record sums into the foreign- exchange market to support its ailing currency.

The cost of default protection suggests other developing countries that may need help. Credit-default swaps for Kazakhstan imply a 52 percent chance the country won't meet its debt obligations in the next five years, according to Bloomberg data. Swaps for Pakistan indicate an 86 percent chance of default.

The IMF has been at the center of some of the biggest financial bailouts of the past three decades, helping broker solutions to the Latin American debt crisis in the 1980s and rescues for Mexico, Russia, Brazil and Asia in the 1990s.

Mexican Peso

The fund established its rapid loan program in the wake of the so-called Mexican peso crisis of December 1994, when the country was forced to abandon its currency peg to avoid depleting its reserves. During the next six weeks the Mexican peso plunged 45 percent, prompting a $17.8 billion loan from the IMF -- at the time, the fund's largest.

In 1997 and 1998, the IMF extended credit lines of more than $80 billion to Indonesia, Thailand and South Korea to help them avoid default after a decline in their currencies pushed up the cost of foreign-debt payments.

Even a modest pickup in loans would help stem financial losses at the IMF that totaled $165 million in 2007. The fund's first shortfall since 1985 led Strauss-Kahn to announce an 11 percent, or $100 million, cut in operating costs that included eliminating at least 380 of the IMF's 2,900 jobs. Even with the cuts, the fund is expected to lose $135 million in 2008.

``If there are no fires, then the fire department does not have much to do, and after a while people start to wonder whether they need a fire department at all,'' said Michael Mussa, the IMF's chief economist from 1991 to 2001. ``This has been the position for the fund in recent years, but things have changed in just a few weeks.''

To contact the reporter responsible for this story: Christopher Swann in Washington at cswann1@bloomberg.net