Leading world economies on Friday pledged US$430 billion in new funding for the IMF, more than doubling its lending power in a bid to protect the global economy from the eurozone debt crisis.
The promised funds from the G20 advanced and emerging economies aim to ensure the IMF can respond decisively, should the debt problems that have engulfed three eurozone countries spread and threaten a fragile global recovery.
“This is extremely important, necessary, an expression of collective resolve,” IMF Managing Director Christine Lagarde said. “Given the increase that has just taken place, we are north of a trillion dollars actually. So I was a bit mesmerized by the amount.”
The US$1 trillion figure includes both the IMF’s existing and newly won resources, as well as loans already committed.
The IMF would be able to use its increased firepower to help any country or region in need. However, Europe’s crisis was the driving force behind the push for more funds, though officials and investors alike said it merely buys time for Europe to undertake more economic reforms.
Greece, Ireland and Portugal have already received bailouts. Investors now are worried that Italy and Spain, the eurozone’s third and fourth-biggest economies, will fail to bring down their debt burdens quickly enough to satisfy financial markets and be forced to follow the same path.
The IMF traditionally has provided aid to struggling emerging market nations, but the euro zone debt crisis has made big industrial economies a new focus. Emerging economies, which have been pressing for a greater say at the IMF, joined in pledging additional funds.
In a central bank statement, China said it “will not be absent from the table” of increasing funds for the IMF, but it did not specify any amount.
Worries about the debt crisis have dominated talks among finance officials in Washington this week for the semi-annual meetings of the IMF and the World Bank, with Spain facing special scrutiny.
The IMF has warned that the crisis presents the gravest risk to global economic expansion, though the G20 said in its statement that the threat of a major blowup has started to recede. The IMF estimated in January it would need US$600 billion in fresh funds, but Lagarde lowered that figure to US$400 billion, saying actions Europe had taken to quell the crisis had cut the risk.
In a sign investors lack confidence that a big IMF war chest can draw a line under the region’s problems, both Spanish and Italian bonds faced pressure on Friday. The yield on Spain’s 10-year bond topped 6 percent before retreating.
David Keeble, global head of interest rate strategy at Credit Agricole Corp, said the expansion of the IMF’s coffers was only a start in resolving the eurozone crisis.
“The US$430 billion is a nice enough size. I’m guessing that they’ll get a few billion more, although the market will no doubt come to the conclusion that no number is big enough,” he said.
Indeed, IMF officials said the new funds would only buy time for Europe to continue difficult economic reforms. Tensions over whether European countries are sufficiently committed to making deep and painful cuts to their budget deficits or whether EU policymakers have dug deeply enough into their own pockets have plagued G20 talks over financial resources.
Lagarde defended Europe’s actions to date, saying its package of fiscal, financial and monetary measures taken in recent months were “sufficient.”