Will the IMF run out of Bailout Money during the Sovereign Debt Crisis

Can IMF Bailout a Country the size of Italy

The International Monetary Fund (IMF)  is funded through contributions from its member nations, acts as the “lender of the last resort” for nations facing “Balance of Payments” problems.Since its conception during the Bretton Woods Conference in 1944 , it has mainly been involved in bailing out small low income countries which did not strain its treasury too much.However the recent sovereign debt problems being faced by “Developed Countries” like Greece promise to severely test the limits of its Bailout Capacity.Note the IMF had a corpus of $250 Billion before the Financial crisis began which was raised to $750 Billion after the Global Financial Crisis made IMF more important as a Bailout provider. The Euro 110 Billion Bailout Fund of Greece is the largest recorded bailout in IMF history.The Greek rescue is more than double the second largest bailout of South Korea during the Asian Financial crisis of 1997. With potential crisis brewing in other developed countries like Spain,Italy and UK , the IMF is entering into uncharted waters.The ability of the  IMF to rescue a country the size of Italy is highly doubtful as the non-European nations are already annoyed at the huge risks taken in bailing out Greece.

Will Developing Countries Bailout Developed Nations?

The willingness of developing member nations to risk their contributions through the IMF in bailing out a huge developed country raises several damning questions.It will be difficult for a developing nation like India or China with millions ekeing out a miserable poverty ridden existence to justify bailout out a rich country like Spain.There is already Indian voices being raised against the IMF bailout out of Greece

IMF loan to Greece: unwarranted favour- Times of India

Few Indians are interested in Greece’s fiscal crisis, or the proposed IMF loan of €15-25 billion as part of a European rescue package. But Indians should worry. IMF resources raised for low and middle income countries are being diverted to bestow a special favour on a rich European country.Greece’s problem is European, and should be tackled by its rich European brethren. It should not dip into limited IMF funds raised for poorer countries.

This is a European problem, not an IMF problem. Why not? Because the IMF was created to deal only with balance of payments problems. The eurozone countries have fiscal problems (high government deficits), but no balance of payments problems. Eurozone countries have given up their individual central banks and currencies, and instead created the European Central Bank, which issues euros in place of old domestic currencies. Banks of eurozone countries get euros without any hurdle from the European Central Bank. So, these countries have no balance of payments problems.

Poorer countries dare not stand up to Europe. But India can. It can raise a serious technical objection. The articles of association of IMF say it can lend only for balance of payment problems. And Greece has a fiscal problem, not a balance of payments one. Some economists say fiscal and balance of payments are related. True, but the distinction was nevertheless made when creating the IMF.

Absent the IMF, other eurozone countries will pick up the full rescue tab, out of sheer self-interest. They have more than enough financial muscle, and should not raid the limited coffers of the IMF.If they need the IMF as a tough cop, let them use it as a technical consultant, not a lender. Tough cops have their uses the world over, but do not usually lend to those they are disciplining.

US Senate unanimously votes against unrestricted IMF bailouts

Even amongst the Developed nations there might be not enough incentive for Countries to bail each other out.While European nations has a massive vested interest in bailing out Greece,the other nations had little incentive to do so.The $40 Billion bill that the US would pay for bailing out Greece has already seen a backlash from segments of the US government . The US Senate has already passed a legislation prohibiting the use of US taxpayer money for IMF operations without restrictions.

US Senate votes no on IMF aid to troubled nations – Reuters

The United States would oppose International Monetary Fund bailout packages to countries that are not likely to repay them under a measure passed by the U.S. Senate on Monday.The 94-0 vote came amid widespread concern that the United States is indirectly supporting a $40 billion IMF bailout approved for Greece earlier this month as that country struggles to rein in its debt.A series of unprecedented U.S. bailouts to stem the 2008-09 economic crisis has angered many Americans and lawmakers have said they are unwilling to bailout foreign countries, as well.

European leaders have asked the IMF to stand ready to provide up to $310 billion as part of a $1 trillion package of loans and guarantees to prevent Greece’s financial woes from spreading to other euro zone countries with big budget deficits, such as Portugal and Spain.The United States is the IMF’s largest contributor and has veto power to block decisions, although has never used it. The United States’ stake in the IMF is roughly worth $54 billion in subscriptions.