Friday, October 31, 2008

IMF Provides Countries With A Generous New Tool To Combat Crisis

Sources: Press Trust of India, IMF Offers USD 100 bn loan to countries facing financial crisis; Association for Financial Professionals, IMF creates emergency loan tool to battle crisis

On Wednesday, October 29th, the IMF announced that it will be using a new emergency lending tool to help countries that have been squeezed by the global credit crunch. The new program is especially designed to help countries that ordinarily have healthy economies, but that have been hit hard by the freezing of the credit markets. Many of these countries have had trouble maintaining "liquidity," meaning that their institutions have had trouble buying and selling their assets smoothly and meeting their payment obligations. The new program, which is worth approximately $100 billion, is specifically directed at improving liquidity.

The IMF's Managing Director, Dominique Strauss-Kahn, sees this new program as a useful way of temporarily helping countries that do not necessarily need to change their economic policies, but that simply need help circulating their assets. For years, the IMF has required countries to adjust their economic and political systems before providing them with loan money. In the face of the global credit crisis, however, the IMF's leadership has turned its focus to helping countries who have short-term liquidity needs, as opposed to long-term policy needs. According to Strauss-Kahn, the new program addresses the gap between these needs in the IMF's "toolkit of financial support."

These new loans will be available to countries that the IMF views as having a strong "track record." A country will be more likely to receive a loan under this new program if, for example, it has had sound economic policies in the past and currently has access to capital markets. The degree of debt that a country currently faces is also likely to affect whether or not it qualifies for this loan; countries that have debt burdens that are relatively manageable will be more likely to receive funds.

According to Strauss-Kahn, the IMF recognizes that the crisis has left the world in an urgent state and the new plan is further proof that the organization is taking steps to help the international community respond to the crisis. It will be interesting to see, in the coming days, how the international community reacts to this plan and how the IMF goes about implementing the criteria that it seems to have formulated for disbursing aid.

Discussion Questions:

1- The IMF will take access to markets, degree of debt, and historical policy soundness into account when disbursing funds. What do you think about the criteria that the IMF has set forth for determining what countries are eligible to participate in the new program? Do you think that the IMF should take other factors into account?

2- The IMF seems to have shifted its focus from countries that need aid and policy guidance to countries that are stable and simply need liquidity. Do you think that this is a positive shift?

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