IMF Plans to Overhaul Credit Program Shunned by Its Members

By Christopher Swann

March 3 (Bloomberg) -- The International Monetary Fund may offer larger, more flexible short-term loans in an effort to sweeten the terms of an emergency credit program that member countries have shunned.

The fund’s board is considering extending the limit on the loans beyond five times member nations’ quota contributions, officials involved in the talks said on condition of anonymity. The changes would come after four months of zero demand for the facility Managing Director Dominique Strauss-Kahn intended for “strong” emerging nations in need of funds for short periods.

Strauss-Kahn is attempting to broaden the IMF’s influence beyond indebted nations that need loans for years to shore up their economies. The objective was likely hampered by a Federal Reserve agreement in October to swap dollars for the local currencies of Brazil, Mexico and South Korea, aiding some of the biggest emerging-market economies.

“Setting up a workable liquidity facility would help re- brand the IMF, ensuring that it remained relevant to responsible and stable countries as well,” said Michael Mussa, a senior fellow at the Peterson Institute and a former IMF chief economist. “The fund is willing to bend over backwards to make this program work.”

Proposals to redesign IMF lending arrangements are scheduled to be discussed at a gathering of leaders of the Group of 20 emerging and developed nations in London on April 2.

Longer Terms

Under the possible changes to the Short-Term Liquidity Facility, qualifying nations could withdraw funds for longer than the original three-month term, the officials said. Countries would also have wider discretion over when they could draw on the funds, they said.

There has been no shortage of interest in the IMF’s more traditional loans in recent months. In November, the Washington- based lender had the busiest month in its 60-year history, agreeing to extend a record $41.8 billion. Those loans are typically for several years, and include scrutiny over economic and budget policies.

Another hurdle Strauss-Kahn is confronting is resistance from officials concerned about how international investors and trading partners would perceive a nation that signed up for IMF assistance.

“It seems that even non-conditional IMF loans carry a stigma,” said Win Thin, emerging markets analyst at Brown Brothers Harriman & Co. “Countries are worried that dealing with the IMF unless they are forced to puts up a big red flag.”

Last Resort

Mark Dow, a money manager at Pharo Management LLC, a New York-based hedge fund with $2 billion under management, said the IMF typically is seen as a lender of last resort rather than an early line of defense. “Many emerging nations feel they have graduated from the IMF and to borrow from them under any conditions would be a step back,” he said.

Two days ago, Argentine President Cristina Fernandez de Kirchner said the global financial crisis should provide momentum to change how the IMF and other international organizations provide aid to emerging market economies.

Fernandez called on the IMF and World Bank to extend aid to countries without conditions, a position she said she’ll push at the G-20 talks next month.

“There needs to be reform of the multilateral lending agencies, which have until today operated by forcing restrictions on emerging markets,” Fernandez said in Buenos Aires. “The IMF and World Bank need to be changed into instruments of financing without conditionality.”

Camdessus’ Attempt

Strauss-Kahn isn’t the first IMF chief to create a liquidity facility within the fund.

In response to the Asian financial crisis of 1997 to 1998, then-Managing Director Michel Camdessus set up the “Contingent Credit Line” intended to be precautionary credit for members with sound policies. The program was introduced in 1999, enhanced in 2000 because of weak demand and expired in March 2003 after no borrowers came forward.

“There is a chance that Strauss-Kahn will eventually succeed where Camdessus failed,” said Claudio Loser, a former director of the fund’s Western Hemisphere department and now a fellow at the Inter-American Dialogue, a policy institute in Washington. “Conditions are becoming so hostile that even more stable, well-run countries may need help.”

The expected demand for the new liquidity facility is one reason Strauss-Kahn is seeking an injection of resources from IMF member countries. In January the former French finance minister said he wanted to double the IMF’s pre-crisis lending ability to $500 billion. A $100 billion contribution from Japan leaves the IMF $150 billion short of its goal.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net