Last month European Finance Ministers agreed to provide an extra $150 billion to the Fund's resources, with Germany and Spain the biggest contributors. But other countries are reluctant to stump up.
Last month European Finance Ministers agreed to provide an extra $150 billion to the Fund's resources, with Germany and Spain the biggest contributors. But other countries are reluctant to stump up. THINKSTOCK

Does the IMF have the right tools?

ANOTHER distressed economy bites the dust.

Hungary is preparing to negotiate the terms of a new bailout with the International Monetary Fund.

The government in Budapest said yesterday that it wants to conclude a rescue deal "as soon as possible", but the negotiations will be fraught.

Relations between Budapest and the Fund hit a low after Hungary's Prime Minister, Viktor Orban, kicked the IMF out of the country when his populist Fidesz party won power in April 2010. And Mr Orban is attempting to curtail the independence of Hungary's central bank.While the IMF's managing director, Christine Lagarde, will not want Hungary to default (which could further destabilise the neighbouring eurozone), she will not want to give Mr Orban carte blanche to push through his dubious reforms either.

Yet the prospect of another IMF lending programme also throws the spotlight on an awkward question: does the Fund have the resources it needs to do its job?

The IMF's present lending capacity is $389bn. Establishing a rescue package for Hungary, which has an economy smaller than Greece, should not be a problem. But the IMF does not have the resources to cover the funding needs of larger troubled European states such as Spain and Italy.

A rescue attempt for struggling Italy, which needs to finance the world's third largest national debt pile, AUD$1.9 trillion, would stretch the Fund's resources beyond breaking point.

Can this change? At the G20 meeting in Cannes last November there was a concerted push to expand the resources of the Fund, and thus help to calm the eurozone panic. The hope was that if investors can be convinced that the IMF has enough firepower to rescue any troubled state, regardless of size, the bond markets will stop panicking and the market borrowing rates of distressed states will fall.

This call to boost the IMF has been partially acted upon.

Last month European Finance Ministers agreed to provide an extra $150 billion to the Fund's resources, with Germany and Spain the biggest contributors. But other countries are reluctant to stump up.

Britain refused to take part in the European fundraising effort, saying that the role of the Fund is "to support countries, not currencies".

Yet British objections are driven more by domestic political concerns rather than any great point of principle. With eurosceptic Conservative backbenchers presently riding high, it is doubtful whether David Cameron could get an extension of the UK contribution to the IMF through the Commons. Tory backbenchers are opposed to any use of British resources to help Europe.

The Obama administration in the US has a similar problem. The White House does not believe it could get an increase in US IMF contributions through Congress, with Tea Party Republicans insisting that America should not be bailing out Europe.



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