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IMF mulls new fund for emerging economies

  The International Monetary Fund is hurrying to approve by early November a package that would let certain emerging market economies exchange local currencies for US dollars to ease short-term credit strains, officials familiar with the plans said on Thursday.


The so-called liquidity swap facility would be available to a group of pre-selected “top tier” emerging market countries -- those that are well-run but may be having difficulties obtaining credit, the officials told Reuters. Some officials are calling it a liquidity support facility. “It will help compensate for the deleveraging of countries’ traditional sources of external finance,” one official said. “The objective is to wrap this up quickly because the need is now.”

Officials said details of the facility were still being ironed out and could be put to a vote as soon as next week. The lack of such access forced many emerging markets to lean heavily on foreign exchange reserves and their sovereign wealth funds to help prop up local currencies and banks. The officials denied market speculation that the IMF was preparing a $1 trillion bailout facility for emerging markets, saying no such figure had been discussed.

In a brief statement, an IMF spokesman said the fund was in discussions on possible loan packages for a number of countries. “The IMF has sizable resources available for lending, which it can make available quickly if needed,” a spokesman said. “IMF lending has a catalytic effect by generating other financing from private and public sources. However, we don’t recognize the $1 trillion figure.” The spokesman said the IMF was reforming its lending instruments to better fit members’ financing needs. In recent weeks, an increasing number of IMF member countries have turned to the fund for policy advice and financing as the financial crisis spreads.

So far, Hungary, Iceland, Belarus, Ukraine, Serbia and Pakistan are in talks with the IMF on economic programs, backed by financing.



For many countries, the issue is that the markets have malfunctioned so severely that they cannot quickly access the capital they need. It has been most acute in dollar-funding markets as banks hoard money and refuse to lend to each other. In recent days, Brazil’s central bank has intervened directly in spot markets to offer dollars and has said it is ready to sell dollar swap contracts up to a hefty $50 billion. Meanwhile, the Mexican central bank sold $1 billion on the foreign exchange market on Thursday to support its currency.

Emerging market stocks, sovereign debt and currencies have all come under intense pressure in recent days as investors unwound funding positions amid worries about the deteriorating world economy. Traders said emerging market currencies saw some reprieve from the IMF news. Opening swap lines gives central banks more ability to lend to their local commercial banks and get US dollars circulating in overnight and short-term money markets.

For example, the US Federal Reserve has set up hundreds of billions of dollars in swap lines with countries primarily in Europe. Last week, it expanded its swap arrangement with the Bank of Japan. Among details of the new facility being worked out are which countries would be eligible for. The question is also how to separate countries facing liquidity strains and those with more serious balance of payments problems. “The trade-off is the more you broaden the eligibility, the more you bring in countries that need to adjust their policies. Then the more you need to deal with conditionality, in which case this will overlap with existing facilities,” an official said.

Emerging economies have long called on the IMF to create a financing instrument they could tap quickly and without the conditions that would apply under normal IMF loans. But the fund has long grappled with the instrument’s design, especially how it could provide the credit without signaling to markets the country may be in trouble. (Reuters)