IMF Expected to Activate Lending Fund to Assist Troubled Countries

Sources:
WSJ: IMF to Soon Activate Special Funding Pool
Bloomberg: IMF Said to Be Discussing Activation of $583 Billion Crisis Lending Pool
Reuters: IMF Chief to Activate Crisis Fund Next Week

As Portugal struggles to manage its debt crisis, and as similar crises linger over several other European nations, the International Monetary Fund is preparing to again offer its assistance. In anticipation that the IMF’s help will be needed, the head of the IMF, Dominique Strauss-Kahn, has recently requested the activation of the New Arrangement to Borrow (NAB).

The New Arrangement to Borrow is a lending facility available to assist countries by providing emergency funding. The NAB works in conjunction with the IMF’s other lending facilities and provides an additional source of liquidity for the IMF to use as it helps countries in times of crisis. The NAB is funded through contributions made by some of the IMF member-nations. The pool of funds in the NAB increased by over $500 billion last year when the IMF included nations from emerging markets in the group of countries that contribute to the fund.

The IMF can use the NAB only after it has been activated. The decision of whether or not to activate the NAB is reviewed every six months. Activation of the NAB is rare, with its last activation occurring 13 years ago, in 1998, when the IMF used it to assist Brazil. Thus, Strauss-Kahn’s request to activate the NAB underscores the potential severity of the crisis in Europe.

Although no formal requests for help have been submitted to the IMF, the fact that Portugal recently voted against measures intended to alleviate its debt problems makes such help from the IMF seemingly inevitable. It is expected that Portugal will need $60-$75 billion in funds to address its debt problems. In addition to helping Portugal, the IMF could also use the NAB to provide additional assistance to other countries in financial trouble, such as Greece, which has already received financial help.