Brazil will have a tough time convincing its risk-averse fellow BRICs — Brazil, Russia, India and China — to bankroll a European rescue no matter how the aid is structured.
Funneling the money through the IMF instead of buying European debt directly offers a layer of protection against default. However, Russia, India and China have already pledged a combined US$70 billion to augment the IMF’s lending power and may be reluctant to do more.
A Brazilian official said Finance Minister Guido Mantega would propose that the BRIC bloc of fast-growing economies make billions of dollars in new funding available to the IMF. The group was scheduled to meet in Washington yesterday, ahead of the IMF’s twice-yearly gathering.
With more than US$4 trillion in reserves all together, it is not surprising that China, Brazil, India and Russia have been cast in the role of Europe’s potential saviors should the debt crisis there deteriorate dramatically.
They may be financially able, but their willingness is in doubt.
“It would be extraordinarily difficult for officials managing the overseas assets of what are still relatively poor developing countries to justify putting those assets at risk if Europe fails to get its own act together,” said Julian Jessop, chief international economist with Capital Economics in London.
Even if Brazil got all the BRICs on board, the funding would probably amount to only a tiny portion of the IMF’s worst-case scenario lending needs. The Brazilian official suggested Brazil might be able to provide US$10 billion to help Europe.
IMF staff members estimated the fund had about US$390 billion it could comfortably lend now, but might need to lend as much as US$840 billion.
This is not the first time Brazil has tried to rally its BRIC brethren around a cause. Earlier this month, Brazil’s call for the big emerging markets to buy more European debt drew a lukewarm response from Asia.
“Brazil has the tradition of coming up with catchy headlines,” said Wei Yao, an economist with Societe Generale in Hong Kong, adding that Brazil’s latest proposal may not be politically practical in China.
Beijing has had some friction with the IMF, particularly over the fund’s assessment of whether the yuan is substantially undervalued.
There is also the matter of clout within the fund. China secured its first top IMF management post just two months ago, even though it is the world’s second-largest economy.
All of the BRICs fought hard for greater IMF voting power and more say in decisionmaking. Last year, they won at least some of the additional power they sought. Ironically, it was Europe that put up the biggest objections and now finds itself needing emerging market support.
Much of Asia remains leery of the IMF and its advice, a hangover from the 1990s Asian debt crisis when IMF loans came with tough conditions that forced sharp government spending cuts. That is a primary reason why many emerging economies built up vast reserves — as a form of self-insurance so that they would never again have to rely on the IMF.
A decade later, many of those emerging markets found the IMF looking to them for additional funding.
The People’s Bank of China signed an agreement in 2009 to buy US$50 billion in IMF notes, a move the fund heralded at the time as a decision that would be “beneficial to all.”
The purchase was part of a G20 pledge in 2009 to triple the IMF’s lending capacity to US$750 billion. Only two countries — the US and Japan — put up more money.
India, Russia and Brazil each pledged to buy up to US$10 billion in IMF notes in 2009 and early last year, but China might face a backlash at home if it commits to any more funding, especially if it were earmarked for assisting European countries that investors consider risky borrowers. Ill-timed investments in some US banks in the early days of the financial crisis were a costly embarrassment for China’s sovereign wealth fund.
As for India, it has earned a reputation for being risk-averse in managing its US$316 billion worth of reserves. About 20 percent of that total is invested in euro debt, and an Indian finance ministry official said last week the proportion would not change.
To be sure, the BRICs have a vested interest in a stable Europe. A full-blown European financial crisis would spare no one. China exports more to the EU than it does to the US. Asia draws far more credit from European banks than from US ones.
However, even if the BRICs raised their IMF commitments, it is unclear whether that would do much to solve Europe’s problems.
The IMF has restrictions on how and when it can lend. Any member country may request financial assistance, but borrowers typically have to agree to an economic program laying out policy measures. Neither Italy nor Spain has asked for help.
One place additional funding could conceivably come in handy is the IMF’s New Arrangements to Borrow, a set of credit arrangements that give the fund access to about US$591 billion. That facility, known in IMF jargon as the “NAB,” was activated last spring for six months and is up for review in November.
There is another, much smaller program called the General Agreements to Borrow, or GAB, which lets the IMF borrow a total of about US$27 billion from 11 industrialized nations. None of the BRIC countries is on that list.
As investor patience with European leadership wears thin, the IMF will most certainly be under pressure to come up with new, politically palatable ideas to contain Europe’s debt strains and prevent them from engulfing Italy or Spain.
Policymakers from deep-pocketed countries including China will no doubt be popular at this weekend’s gathering.
However, if the BRICs hold the only hope for European rescue, the EU, the IMF and the markets may be in for a big disappointment.
“The upshot is that we remain extremely skeptical of any talk that China, the BRICs, or other groups of emerging economies, are ready or able to come to the rescue of the eurozone,” Jessop said.
Additional Reporting by Kevin Yao
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