Saturday, September 10, 2011
It’s that time again when the IMF has just telegraphed something very big and very bad is about to happen. But let’s back up, and paraphrase our post from March: “Back in April 2010, before Waddell and Reed sold a few shares of ES, effectively destroying the market on news that Europe was insolvent, we made the following observation: “The IMF has just announced that it is expanding its New Arrangement to Borrow (NAB) multilateral facility from its existing $50 billion by a whopping $500 billion (SDR333.5 billion), to $550 billion.”
Little did we know that our conclusion “something big must be coming” would prove spot on just a month later after Greece, then Ireland, then Portgual, and soon Spain, Italy, Belgium, and pretty much all other European countries would topple like dominoes tethered together by a flawed monetary regime. Well, based on news from Dow Jones we can now safely predict the following: “something bigger must be coming.” The specific reason for this prediction was the following: “the International Monetary Fund is expected to soon activate a special funding pool that will boost the fund’s ability to prevent or resolve economic crises.” Sure enough something bigger came, and then some: Greece received its second bailout package about 4 months later, only to see the entire Eurozone hang by a thread following the political fallout that has since ensued. Well, it is time to shift from the comparative to the superlative: “something biggest must be coming.”
According to Dow Jones the “International Monetary Fund will likely re-activate a $580 billion resource pool in coming weeks to ensure it has funds to help cover Europe’s worsening sovereign-debt crisis, according to several people close to the matter.” Why is this a big flashing red light? “According to the IMF, the pool of supplementary resources are only to be activated when “needed to forestall or cope with a threat to the international monetary system.” So it is settled: just like on the previous two occasions, the biggest load of feces yet is about to hit the fan. The only real question is: how many trillions will the real global backstopper, China, be forced to match this massive expansion of the former world rescuer with… Also, what comes after “biggest”?
From Dow Jones:
The IMF activated the so-called New Arrangements to Borrow in April of this year for a six-month period. The IMF’s board, which met informally on the issue late Friday afternoon, would have to approve re-activation of the resource pool if the fund wants to tap it beyond September.
“A large majority of the board members are in favor of re-activating the NAB,” as a precautionary measure, one of the people said. The board is scheduled to formally approve activation next Friday, the person said.
David Lipton, first deputy managing director at the IMF, said recently in a private meeting that keeping the NAB available may be necessary in coming months given Europe’s debt meltdown, people familiar with the matter said. The crisis is entering a dangerous new phase as the risk of Greece defaulting rises and Italy and Spain’s sovereign debt has come under attack.
Lipton didn’t specify whether the facility needed to be tapped for a specific country, the people said. The IMF declined to comment.
According to the IMF, the pool of supplementary resources are only to be activated when “needed to forestall or cope with a threat to the international monetary system.” The pool can only be activated by the board after IMF managing director makes a special request.
And while America is guaranteed to foot the bill once again (with China below the US in terms of priority payments despite its much higher cost basis and implicit investment into Europe), it will do so only on a provisional basis – none of the biggest IMF contributors have enacted the formal quota increase. Which means that the US will be stuck in legal limbo when Europe pulls a Greece, collects American cash, and then finds it has no collateral to pay back with.
So far, the IMF has already allocated nearly $7 billion from the NAB. In total, the NAB can provide up to about $580 billion in supplemental resources to the IMF, but only around $331 billion is currently available for use. Based on how much cash the fund can commit to within the next year–around $394 billion–without the special kitty, the IMF would only have around $60 billion on hand.
The special resource base, funded through bilateral loans from countries such as the U.S. and China, was designed as a temporary measure. It is expected to be largely replaced by an agreement late last year by the fund’s board of directors to increase quotas, the share of contributions that each member must give to fund IMF lending.
The board of governors agreed in December to roughly double quotas from around $375 billion to around $750 billion. But out of the 187 member countries, only 17 have legally accepted the increase, including Japan, the U.K. and Korea. Most of the countries with the biggest quotas, such as the U.S., China and Germany, haven’t yet gone through the legal process, such as parliamentary or congressional approval, need to hand over their promised dues.
There is little we can add here that was not said during one of the two prior massive IMF intervention attepts, both of which predicted a huge global shake up within months.
Which is why we will end this post with the same words we ended the previous iteration in the IMF global rescue series:
“US taxpayers: our condolences.”
This article was posted: Saturday, September 10, 2011 at 12:39 am