IMF mulls new credit line to stem crisis

The International Monetary Fund is contemplating a proposal to offer new short-term credit lines to governments to prevent the spread of global financial crises, senior IMF officials said.The program has the tentative backing of key world financial leaders who are expected to approve the new lending tool at the coming meetings of the Group of 20 industrialized and developing economies, according to three senior officials from G-20 countries.Investors believe Greece is likely to default on its government debt in coming weeks. This is increasing borrowing costs for other European governments and raising fears about the health of Europes banks and even the possibility of global recession. While the IMF has made long-term loans to Greece, Ireland and Portugal to help stabilize their finances, it lacks a tool to make short-term credit lines available to countries to help forestall crises.Under a draft plan, the IMF would offer short-term credit lines equal to roughly three times a countrys contributions to the fund. In Europe, for example, the IMF could offer short-term lines valued at roughly $50 billion combined to Italy and Spain, which are struggling with rising costs to service their large government debts. The lines would complement financing from the European bailout fund and the European Central Bank. The credit lines for those two countries could double to roughly $100 billion combined once their IMF contributions increase next year.The proposed credit lines are relatively modest compared with the size of Europes €440 billion ($591 billion) bailout fund. But they would aim to protect countries such as Italy and Spain from a full-fledged crisis. They could also help emerging-market countries, such as South Korea, that have sound economic fundamentals but could be buffeted by volatile global conditions.In an interview, Mexicos Deputy Finance Minister José Antonio Meade said the G-20 is considering a broad set of possibilities to improve global financial safety nets. Mr. Meade said the G-20 expects to produce a plan by the Cannes, France, leaders summit in November.The IMF has been bouncing around the idea of offering short-term credit lines for a number of months. Such lines could help boost market confidence that governments can withstand financial pressure and lower their debts costs, the IMF staff said in a May policy paper. Another idea is to offer the lines to a group of countries, which could install a firewall around the core of the system to prevent or mitigate the propagation of virulent shocks, fund staff said in more recent policy paper on new lending options.IMF Managing Director Christine Lagarde said last month the IMF could lend to groups of countries, in response to a question about how the fund might help backstop Europes efforts to quell the debt crisis.We have really tried to be creative about our facilities and instruments, particularly for countries with sound economic policies that should be immune to contagion, Ms. Lagarde said.The new credit lines could be used cooperatively with regional financing programs such as the European bailout program and Asias $120 billion effort.