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22 August 2011

FT: A bigger, bolder fund can stop the next crash


Hendrikus Johannes Witteveen, IMF MD 1973-78, is of the opinion that unusual problems require unconventional solutions. The International Monetary Fund should establish a new "debt facility" to help indebted countries work out their finances.

The European Central Bank and US Federal Reserve are close to the limit of their capabilities. Resorting to debt reduction – an organised default – would help the respective countries but cause large losses for European banks, insurers and pension funds, with systemic risks comparable to those of Lehman’s failure in 2008.

A new “debt facility” would allow the fund to borrow large amounts from all surplus countries, and so provide temporary financing even for a big country such as Italy. Such a country could apply to the fund for a stand-by arrangement meeting all its financing needs for two years – until its budget deficit could be cut sufficiently. This would reassure markets, reduce interest rates to normal and the stand-by arrangements (SBA) would be only partially used, if at all. Such a facility would make it possible to tap the vast central bank reserves of China, Japan or Middle Eastern countries, besides those of Germany, for example, in Europe.

This would be more attractive for the surplus countries than directly financing the deficit countries. IMF financing always has priority in any default, so the risk for financing countries is minimal: the amounts lent to the fund will be available if they later wish to draw on the fund. They would remain in central banks’ reserves, not affecting taxpayers.

A final advantage would be to bring big countries such as Italy and Spain under IMF conditionalilty. The fund could then take over the work of the ECB, whose courageous buying of indebted countries’ bonds requires adequate fiscal policies. This is clearly more the task of the IMF than of the ECB.

Full article (FT subscription required)



© Financial Times


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